Statement of Cash Flows COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks

Statement ofCash Flows

COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

Chapter 10

Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 10, Slide #2

Statement Use

• Internal users– Determine dividend policy– Evaluate cash generated by operations– Review investing and financing policy

• External users– Assess firm’s ability to increase dividends– Assess firm’s ability to pay debt from operations– Assess firm’s relationship of cash from operations

to total cash


Statement Structure

Cash flows from operations

+ Cash flows from investing activities

+ Cash flows from financing activities

= Change in cash

+ Beginning cash balance

= Ending cash balance


Operating Activities

Cash inflows from• Sale of goods or

services• Returns on loans

(interest)• Return on equity

securities (dividends)

Cash outflows for• Payments for

acquisitions of inventory• Payments to employees• Payments for taxes• Payments for interest• Payments for other

expenses

The cash effects of transactions and other events that enter into the determination of net income:


Investing Activities

Cash inflows from• Receipts for loans

collected• Sales of debt or equity

securities• Sales of plant, property,

and equipment

Cash outflows for• Loans to other entities• Investment in debt or

equity securities• Purchase of plant,

property, and equipment

Lending money and collecting on those loans and acquiring and selling investments and productive long-term assets:


Financing Activities

Cash inflows from• Sale of equity securities• Sale of bonds,

mortgages, notes, and other short- and long-term borrowings

Cash outflows for• Payment of dividends• Reacquisition of capital

stock • Payment of amounts

borrowed

Borrowing and repaying long-term loans; issuing equity securities; payment of dividends to shareholders:


Cash Flows From Operations

• 2 methods for operating section of Cash Flow:• Direct method

– Presents the income statement on a cash basis

– Supplemental information required: reconciliation of net income to cash provided by operations

• Indirect method– Adjusts net income for items that affected net income but did

not affect cash

– Supplemental information required: cash paid for income taxes and for interest

– Most widely used


Cash Flows From Operations:Direct Method

Cash flows from operations: Cash received from customers $ 370,000 Cash paid to suppliers and employees (310,000) Interest received 10,000 Interest paid (net of amount capitalized) (4,000) Income taxes paid (15,000) Net cash provided by operations 51,000

Presents the income statement on a cash basis


Cash Flows From Operations:Indirect Method

Cash flows from operations: Net earnings $ 40,000 Provision for depreciation 6,000 Provision for allowance for doubtful accounts 1,000 Deferred income taxes 1,000 Loss on property, plant, and equipment disposals 2,000 Changes in operating assets and liabilities: Receivables increase (2,000) Inventories increase (4,000) Accounts payable increase 5,000 Accrued income taxes increase 2,000 Net cash provided by operations $51,000

Adjusts net income for items that affected net income but did not affect cash


Cash Flows From Operations

Cash flows from operations: Cash received from customers $ 370,000 Cash paid to suppliers and employees (310,000) Interest received 10,000 Interest paid (net of amount capitalized) (4,000) Income taxes paid (15,000) Net cash provided by operations 51,000

Cash flows from operations: Net earnings $ 40,000 Provision for depreciation 6,000 Provision for allowance for doubtful accounts 1,000 Deferred income taxes 1,000 Loss on property, plant, and equipment disposals 2,000 Changes in operating assets and liabilities: Receivables increase (2,000) Inventories increase (4,000) Accounts payable increase 5,000 Accrued income taxes increase 2,000 Net cash provided by operations $51,000

Direct

Indirect


Cash Flows From Investing Activities

Cash flows from investing activities: Capital expenditures $ (30,000) Proceeds from property, plant and equipment disposals 6,000 Net cash used in investing activities (24,000)


Cash Flows From Financing Activities

Cash flows from financing activities: Net proceeds from repayment of commercial paper $ (4,000) Proceeds from issuance of long-term debt 6,000 Dividends paid (5,000) Net cash used in financing activities (3,000)


Statement of Cash Flows – Direct Method(supplemental disclosures not illustrated)

OPERATING ACTIVITIESCash received from customers 370,000$ Cash paid to suppliers and employees (310,000) Interest received 10,000 Interest paid (4,000) Income taxes paid (15,000)

Net cash provided (used) by operating activities 51,000

INVESTING ACTIVITIESCapital expenditures (30,000) Proceeds from property, plant, and equipment disposals 6,000

Net cash provided (used) by operating activities (24,000) FINANCING ACTIVITIES

Net proceeds from repayment of commercial paper (4,000) Proceeds from issuance of long-term debt 6,000 Dividends paid (5,000)

Net cash provided (used) by financing activities (3,000)

Increase in Cash 24,000

Beginning cash balance 8,000 Ending cash balance 32,000$

Statement of Cash Flows – Indirect Method (supplemental disclosures not illustrated)

OPERATING ACTIVITIESNet earnings 40,000$ Provision for depreciation 6,000 Provision for allowance for doubtful accounts 1,000 Deferred income taxes 1,000 Loss on property, plant, and equipment disposals 2,000 Changes in operating assets and liabilities:

Receivables increase (2,000) Inventories increase (4,000) Accounts payable increase 5,000 Accrued income taxes increase 2,000

Net cash provided (used) by operating activities 51,000

INVESTING ACTIVITIESCapital expenditures (30,000) Proceeds from property, plant, and equipment disposals 6,000

Net cash provided (used) by operating activities (24,000) FINANCING ACTIVITIES

Net proceeds from repayment of commercial paper (4,000) Proceeds from issuance of long-term debt 6,000 Dividends paid (5,000)

Net cash provided (used) by financing activities (3,000)

Increase in Cash 24,000

Beginning cash balance 8,000 Ending cash balance 32,000$


Operating Cash Flow/Current Maturities of Long-Term Debt and Current Notes Payable

• Indicates a firm’s abilities to meet its current maturities of debt

• Higher ratio indicates better liquidity

Operating Cash Flow

Current Maturities of Long-Term Debtand Current Notes Payable


Operating Cash Flow to Total Debt

• Indicates a firm’s ability to cover total debt with the yearly operating cash flow

• Conservative approach is to include all possible balance sheet debt

Operating Cash Flow

Total Debt


Operating Cash Flow per Share

• A better indication of a firm’s ability to make capital expenditure decisions and pay dividends than is earnings per share

• Does not reflect firm’s profitability– Firms are prohibited from reporting this statistic in

financial statements or in the notes thereto

Operating Cash Flow - Preferred Dividends

Diluted Weighted AverageCommon Shares Outstanding


Operating Cash Flow to Cash Dividends

• Indicates a firm’s ability to cover cash dividends with the yearly operating cash flow

Operating Cash Flow

Cash Dividends


Procedures to Develop the Statement of Cash Flows (cont’d)

1. Determine change in cash and cash equivalents

2. Compute the change in all other balance sheet accounts

3. Classify as operating, investing, and financing


Procedures to DevelopDirect Operating Cash Flows

1. Operating section describes income statement accounts as receipts or payments

2. Cash receipts• From customers• From other operating sources

3. Cash payments• For merchandise• To employees• For other operating expenses


Procedures to DevelopIndirect Operating Cash Flows

1. Begin with net income

2. Eliminate gains and losses that relate to investing and financing activities

3. Add back or deduct adjustments to change accrual-based net income to cash basis• Current noncash assets• Current liabilities

Documents

Statement of Cash Flows COPYRIGHT ©2007 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks