Reporting and Analyzing Cash Flows

Slide
17-1
Reporting and Analyzing

Cash Flows
Slide
17-2
Importance of Cash Flows

How
How did
didthe
the
business
businessfund
fundits
its
operations?
operations?
Does
Doesthe
thebusiness
business
have
havesufficient
sufficient cash
cash
to
topay
payits
itsdebts
debtsas
as
they
theymature?
mature?
Did
Didthe
thebusiness
business
make
makeany
anydividend
dividend
payments?
payments?
Did
Didthe
thebusiness
business
borrow
borrow any
anyfunds
fundsor
or
repay
repayany
anyloans?
loans?
Slide
17-3
Measuring Cash Flows

Cash
Equivalents

Cash
Cash
Currency
Short-term,
Short-term,highly
highlyliquid
liquidinvestments.
investments.
Readily
Readilyconvertible
convertibleinto
intocash.
cash.
So
Sonear
near maturity
maturitythat
that market
market value
valueis
isunaffected
unaffectedby
by
interest
interest rate
ratechanges.
changes.
Slide
17-4
Classifying Cash Flows

The Statement of Cash Flows includes the
following three sections:
Operating Activities
Investing Activities
Financing Activities
Slide
17-5
Operating Activities
Inflows
Inflows
Receipts
Receipts from
from customers.
customers.
Cash
Cashdividends
dividends received.
received.
Interest
Interestfrom
from borrowers.
borrowers.
Other.
Other.
Outflows
Outflows
Salaries
Salaries and
andwages.
wages.
Payments
Paymentsto
tosuppliers.
suppliers.
Taxes
Taxes and
and fines.
fines.
Interest
Interestpaid
paidto
tolenders.
lenders.
Other.
Other.
Slide
17-6
Investing Activities
Inflows
Inflows

Selling
Sellinglong-term
long-termproductive
productive
assets.
assets.
Selling
Sellingequity
equity investments.
investments.
Collecting
Collectingof
of principal
principal on
onloans.
loans.
Other.
Other.
Outflows
Outflows

Purchase
Purchaselong-term
long-term productive
productive
assets.
assets.
Purchase
Purchaseequity
equity investments.
investments.
Purchase
Purchasedebt
debt investments.
investments.
Make
Makeloans.
loans.
Cash
Cash
Flows
Flows
from
from
Investing
Investing
Activities
Activities
Slide
17-7
Financing Activities
Inflows
Inflows

Issuing
Issuingits
its own
ownequity
equity
securities.
securities.
Issuing
Issuingbonds
bonds and
andnotes.
notes.
Issuing
Issuingshort-term
short-termand
andlonglongterm
termliabilities.
liabilities.
Outflows
Outflows

Pay
Pay dividends
dividends to
tostockholders.
stockholders.
Purchase
Purchasetreasury
treasury stock.
stock.
Repay
Repay cash
cashloans.
loans.
Cover
Cover withdrawals
withdrawals by
byowners
owners..
Cash
Cash
Flows
Flows
from
from
Financing
Financing
Activities
Activities
Slide
17-8
Noncash Investing and Financing

Items
Items requiring
requiring separate
separate disclosure
disclosure
include:
include:

Retirement
Retirement of
of debt
debt by
by issuing
issuing equity
equity
securities.
securities.

Conversion
Conversion of
of preferred
preferred stock
stock to
to
common
common stock.
stock.

Leasing
Leasing of
of assets
assets in
in aa capital
capital lease
lease
transaction.
transaction.
Slide
17-9
Company Name
Statement of Cash Flows
Covered Period
Cash flows from operating activities:
[List of individual inflows and outflows]
Net cash provided (used) by operating activites
Cash flows from investing activities:
Net cash provided (used) by investing activites
Cash flows from financing activities:
Net cash provided (used) by financing activites
Net increase (decrease) in cash
Cash (and equivalents) balance at beginning of period
Cash (and equivalents) balance at end of period
Exh.
17.5
$ #####
#####
#####
$ #####
#####
$ #####
Slide
17-10
Exh.
17.5
Company Name
Covered Period
Cash flows from operating activities:
Net cash provided (used) by operating activites
$ #####
Cash flows from investing activities:
There are two acceptable methods to determine Cash
Flows from Operating Activities:
Net cash provided (used) by investing activites
#####
Cash flows from financing
activities:
Direct
Method
Method
Net cash provided (used)Indirect
by financing
activites
#####
$ #####
#####
Cash (and equivalents) balance at beginning of period
$ #####
Cash (and equivalents) balance at end of period
Slide
17-11
Analyzing Noncash Accounts

The
The changes
changes in
in cash
cash can
can be
be determined
determined
by
by analyzing
analyzing the
the noncash
noncash accounts
accounts on
on
the
the balance
balance sheet.
sheet.
Cash
Cash == Liabilities
Liabilities ++ Stockholders
Stockholders
Equity
Equity Noncash
Noncash Assets
Assets
Derives from . . .
Assets
Assets == Liabilities
Liabilities ++ Stockholders
Stockholders Equity
Equity
Slide
17-12
Lets look at the

Direct Method
for preparing
the Cash Flows
from Operating
Activities
section.
Slide
17-13
Direct Method
Cash Received from Customers
Can be computed two ways:
Obtained from cash receipts journal.
Obtained from accrual sales information.
Cash received
= Sales
from customers
- Increase in A/R
+ Decrease in A/R
Exh.
17.12
Slide
17-14
Direct Method
Cash Paid for Merchandise
Step 1
Purchases = COGS
+ Increase in inventory
- Decrease in inventory
Step 2
Cash paid for

merchandise
= Purchases
+ Decrease in A/P
- Increase in A/P
Exh.
17.13
Slide
17-15
Direct Method
Wages and Operating Expenses
Exh.
17.14
The
The cash
cash paid
paid for
for wages
wages and
and other
other operating
operating
expenses
expenses is
is affected
affected by
by
(1)
(1) whether
whether the
the expense
expense was
was prepaid,
prepaid, and
and
(2)
(2) whether
whether the
the expense
expense was
was accrued.
accrued.
Cash paid for
wages and
other operating
expenses
Wages
and other
=
operating
expenses
+ Increase in
prepaid expenses
- Decrease in
prepaid expenses
+ Decrease in
accrued liabilities
- Increase in
accrued liabilities
Slide
17-16
Direct Method
Cash Paid for Interest and Taxes
Interest
Cash paid
for interest
Interest
=
Expense
+ Decrease in
interest payable
- Increase in
interest payable
Taxes
Cash paid
for taxes
+ Decrease in
taxes payable
- Increase in
taxes payable
Tax
=
Expense
Exh.
17.15
Slide
17-17
Direct Method
Depreciation Expense
Depreciation,
Amortization, and
Depletion Expenses
Operating cash flows
are not involved.
They are not disclosed
in the Statement of
Cash Flows using the
direct method.
Slide
17-18
Direct Method
Gains and Losses
Gains and losses
do not appear on
the Statement of
Cash Flows
using the Direct
Method.
Slide
17-19
Lets look at the

Indirect Method
for preparing
the Cash Flows
from Operating
Activities
section.
Slide
17-20
Indirect Method of Reporting

Operating Cash Flows
Changes
Changesin
incurrent
currentassets
assets
and
andcurrent
currentliabilities.
liabilities.
Cash
CashFlows
Flows
from
fromOperating
Operating
Activities
Activities
Net
Net
Income
Income
++Losses
Lossesand
and
--Gains
Gains
++Noncash
Noncash
expenses
expensessuch
suchas
as
depreciation
depreciationand
and
amortization.
amortization.
97.5%
97.5% of
of all
all companies
companies use
use the
the indirect
indirect method.
method.
Slide
17-21
Indirect Method of Reporting

Operating Cash Flows
Current
Assets
Current
Liabilities
Change in Account Balance During Year

Increase
Decrease
Subtract from net
Add to net income.
income.
Add to net income.
Subtract from net
income.
Use this table when adjusting Net Income

to Operating Cash Flows.
Slide
17-22
Indirect Method
Example
East,
East, Inc.
Inc. reports
reports $125,000
$125,000 net
net income
income for
for the
the
year
year ended
ended December
December 31,
31, 2002.
2002.
Accounts
Accounts Receivable
Receivable increased
increased by
by $7,500
$7,500
during
during the
the year
year and
and Accounts
Accounts Payable
Payable
increased
increased by
by $10,000.
$10,000.
During
During 2002,
2002, East
East reported
reported $12,500
$12,500 of
of
Depreciation
Depreciation Expense.
Expense.
What is East, Inc.s Operating

Cash Flow for 2002?
Slide
17-23
Indirect Method
Example
Net
Netincome
income
Deduct:
Deduct:Increase
Increasein
inaccounts
accounts
receivable
receivable
For
For the
the indirect
indirect
Cash
provided
by
operating
Cash
provided
by
operating
method,
start
with
method,
start
with
activities
activities
net
net income.
income.
$$ 125,000
125,000
Slide
17-24
Indirect Method
Example
Net
Netincome
income
Add:
Add:Depreciation
Depreciationexpense
expense
Deduct:
Deduct:Increase
Increasein
inaccounts
accounts
receivable
Add
receivable
Add noncash
noncash
expenses
expenses such
such as
as
Cash
by
operating
Cashprovided
provided
by
operating
depreciation,
depreciation,
activities
activities
depletion,
depletion,
amortization,
amortization, or
or bad
bad
debt
debt expense.
expense.
$$ 125,000
125,000
12,500
12,500
Slide
17-25
Indirect Method
Example
Net
Netincome
income
Add:
Add:Depreciation
Depreciationexpense
expense
Deduct:
Deduct:Increase
Increasein
inaccounts
accounts
receivable
receivable
$$ 125,000
125,000
12,500
12,500
Change inby
Account
Balance During Year
Cash
Cashprovided
provided
byoperating
operating
Increase
Decrease
activities
activities
Current
Assets
Current
Liabilities
Subtract from net

income.
Add to net income.
Add to net income.

Subtract from net
income.
(7,500)
(7,500)
Slide
17-26
Indirect Method
Example
Net
$$ 125,000
Netincome
income
125,000
Add:
12,500
Add:Depreciation
Depreciationexpense
expense
12,500
Deduct:
Deduct:Increase
Increasein
inaccounts
accounts
receivable
(7,500)
receivable
(7,500)
10,000
Add:
Add:Increase
Increasein
inaccounts
accountspayable
payable
10,000
Cash
Cashprovided
providedby
byoperating
operating
Change in Account Balance During Year
activities
activities
Current
Assets
Current
Liabilities
Increase
Subtract from net
income.
Add to net income.
Decrease
Add to net income.
Subtract from net
income.
Slide
17-27
Indirect Method
Example
Net
Netincome
income
Add:
Add:Depreciation
Depreciationexpense
expense
Deduct:
Deduct:Increase
Increasein
inaccounts
accounts
receivable
receivable
Add:
Add:Increase
Increasein
inaccounts
accountspayable
payable
Cash
Cashprovided
providedby
byoperating
operating
activities
activities
$$ 125,000
125,000
12,500
12,500
(7,500)
(7,500)
10,000
10,000
$$ 140,000
140,000
If we used the Direct Method, we would get the same

$140,000 for Cash Provided by Operating Activities.
Slide
17-28
Lets do a
complete
Statement of
Cash Flows
using the
Indirect
Method.
Slide
17-29

Indirect Method
Prepare
Prepare aa Statement
Statement of
of Cash
Cash
Flows
Flows for
for the
the period
period ending
ending
December
December 31,
31, 2001
2001 using
using the
the
Indirect
Indirect Method.
Method.
Refer
Refer to
to the
the following
following
information
information .. .. ..
Slide
17-30
B&G Company
Comparative Balance Sheets
December 31
2001
Assets
Cash
Accounts receivable
Inventories
Land
Equipment
Accumulated depreciation-equipment
Total Assets
Liabilities and Stockholders' Equity
Accounts payable
Bonds payable
Common stock, $1 par
Retained earnings
Total Liabilities and Stockholders' Equity
2000
Increase
or
(Decrease)
63,000 $
85,000
170,000
75,000
270,000
(66,000)
597,000 $
22,000 $ 41,000
76,000
9,000
189,000
(19,000)
100,000
(25,000)
200,000
70,000
(32,000)
34,000
555,000
39,000 $
150,000
209,000
199,000
597,000 $
47,000
200,000
174,000
134,000
555,000
(8,000)
(50,000)
35,000
65,000
Slide
17-31
Additional
Additional Information
Information for
for 2001:
2001:

Net
Net income
income was
was $105,000.
$105,000.

Cash
Cash dividends
dividends declared
declared and
and paid
paid were
were
$40,000.
$40,000.

Bonds
Bonds payable
payable of
of $50,000
$50,000 were
were redeemed
redeemed
for
for $50,000
$50,000 cash.
cash.

Common
Common stock
stock was
was issued
issued for
for $35,000
$35,000
cash.
cash.
Slide
17-32
B&G Company
For the Year Ended December 31, 2001
Cash flows from operating activities
Net income
Adjustments to accrual-basis net income:
Add
Add noncash
noncash expenses
expenses
and
and losses.
losses.
Subtract
Subtract noncash
noncash
revenues
revenues and
and gains.
gains.
Then,
Then, analyze
analyze the
the
changes
changes in
in current
current
assets
assets and
and current
current
liabilities.
liabilities.
105,000
Start
Start with
with
accrual-basis
accrual-basis
net
net income.
income.
Slide
17-33
B&G Company
Net income
$
Depreciation expense
$
34,000
Increase in accounts receivable
(9,000)
Decrease in inventory
19,000
Decrease in accounts payable
(8,000)
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities
Curre
Current
nt
Asse
Assets
ts
Curre
Current
nt
LLia
iabilitie
bilitiess
105,000
36,000
141,000
Cha
Chang
ngee in
in Account
Account Ba
Bala
lance
nce During
During Ye
Yeaarr
In
De
Incre
creaase
se
Decre
creaase
se
SSubtra
Add
ubtract
ct from
from nneett
Add to
to ne
nett incom
incomee. .
in
incom
comee. .
Add
SSubtra
Add to
to ne
nett incom
incomee. .
ubtract
ct from
from ne
nett
incom
incomee. .
Slide
17-34
B&G Company
Net income
$
$
34,000
(9,000)
19,000
(8,000)
Total adjustments
Now,
Now, lets
lets complete
complete
the
the investing
investing
section.
section.
105,000
36,000
141,000
Slide
17-35
B&G Company
Net income
$
$
34,000
(9,000)
19,000
(8,000)
Total adjustments
Proceeds from sale of land
25,000
Purchase of equipment
(70,000)
Net cash used by investing activities
Cash flows from financing activities
Now,
Now, lets
lets complete
complete
the
the financing
financing section.
section.
105,000
36,000
141,000
(45,000)
Slide
17-36
B&G Company
Net income
$
$
34,000
(9,000)
19,000
(8,000)
Total adjustments
Proceeds from sale of land
25,000
Purchase of equipment
(70,000)
Net cash used by investing activities
Cash flows from financing activities
Proceeds from issuance of common stock
35,000
Redemption of bonds
(50,000)
Payment of dividends
(40,000)
Net cash used by financing activities
Net increase in cash
Cash, January 1, 2001
Cash, December 31, 2001
$
105,000
36,000
141,000
(45,000)
(55,000)
41,000
22,000
63,000
Slide
17-37
Analyzing Cash Sources and Uses

Cash Flows of Competitors
all numbers in thousands
Fisher
Sprint
Tektron
Cash provided (used) by operating
activities
$
90,000 $
40,000 $
(24,000)
Cash provided (used) by investing
activities:
Proceeds from sale of operating
assets
26,000
Purchase of operating assets
(48,000)
(25,000)
Cash provided (used) by financing
activities:
Proceeds from issuance of debt
13,000
(27,000)
Repayment of debt
$
15,000 $
15,000 $
15,000
Exh.
17.19
Slide
17-38
Cash Flow on Total Assets

Used,
Used, along
along with
with income-based
income-based ratios,
ratios, to
to
assess
assess company
company performance.
performance.
Cash Flow on
Total Assets
Operating cash flows

Average total assets
Exh.
17.20
Slide
17-39
End

Reporting and Analyzing Cash Flows

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Reporting and Analyzing Cash Flows

Uploaded by

Copyright:

Available Formats

Slide

Reporting and Analyzing

Importance of Cash Flows

Measuring Cash Flows

Classifying Cash Flows

Noncash Investing and Financing

Analyzing Noncash Accounts

Lets look at the

Cash paid for

Lets look at the

Indirect Method of Reporting

Indirect Method of Reporting

Change in Account Balance During Year

Use this table when adjusting Net Income

What is East, Inc.s Operating

Subtract from net

Add to net income.

If we used the Direct Method, we would get the same

Statement of Cash Flows

Analyzing Cash Sources and Uses

Cash Flow on Total Assets

Operating cash flows

You might also like