 Chapter 14 Statement of Cash Flows  The Statement of Cash Flows Summary of company’s transactions that involve cash over a period of time Transactions are classified as:  Operations  Investments  Financing Figure 14-1 Sample statement of cash flows   Required for financial statements by SFAS 95 (1987) Statement of Cash Flows  Primary purpose is to provide relevant information about cash receipts and cash disbursements of the company during the period  Serves to complement the other financial statements  Focus is on cash flows, not income  Reconciles the balance sheet and the income statement  Definition of Cash  Cash consists of coin, currency, and available funds on deposit at the bank Negotiable instruments such as money orders, certified checks, cashier’s checks, personal checks, and bank drafts are also considered cash  Also certain cash equivalents, which include commercial paper and other debt investments with maturities of less than three months are included in the statement of cash flows  Content of Statement of Cash Flows  Explains change in cash and cash equivalents  Cash equivalents are defined as short-term, highly liquid investments near to maturity  Examples of cash equivalents are Treasury bills and money market funds  Format of SCF includes the following three sections:     cash flow from operating activities cash flow from investing activities cash flow from financing activities Like US GAAP, IFRS requires the presentation of a SCF, and the format is largely the same  General Description of the Statement of Cash Flows Figure 14-2 Standard statement of cash  flows Cash Provided (Used) by Operating Activities  Cash Flows from operating activities is based on the income statement, and converts income activity to a cash basis  There are two formats for the presentation of CF from operating activity:  Direct Method: this technique shows cash received from customers and cash paid to various entities for operating activities  Indirect Method: this technique starts with net income and makes adjustments to net income to convert it to a cash basis  Cash Provided (Used) by Operating Activities  If the direct method is used, the indirect method must be presented in a supplementary schedule  FASB recommends companies use the direct method including the supplementary schedule  The direct method is more straight-forward and provides more information with the supplementary disclosure, but the vast majority of companies present only the indirect method  Cash Provided (Used) by Investing Activities  Cash Flows from investing activities explain the changes in cash from the purchase or sale of the company’s (primarily) long-term assets  Examples of investing activity includes:  Cash paid for purchase of equipment, land, buildings, marketable securities (available-forsale and equity), intangible assets, and most other long term assets  Cash received from sale of equipment, land, buildings, marketable securities (availablefor-sale and equity), intangible assets, and most other long term assets  Cash paid for issue of non-trade notes receivable (both short-term and long-term)  Cash received for repayment on non-trade notes receivable (both short-term and longterm)  10 Deriving Cash Flow from Accrual Financial Statements Operating – Insurance Expense  Cash outflow related to insurance expense can be determined by looking at changes to the prepaid insurance account Figure 14-10 Determining cash outflow related to insurance expense  19 Deriving Cash Flow from Accrual Financial Statements Operating – Depreciation, Amortization, and Losses on Sales  There is no operating cash effect with these items  Note : They are a part of net income and therefore the operating section of the statements of cash flows must be adjusted for these items under the indirect method of preparing the statements of cash flows  20 Deriving Cash Flow from Accrual Financial Statements Operating – Interest Expense  Cash outflow related to interest expense can be determined by looking at changes in the discounts on note payable account Figure 14-11 Determining cash outflow related to interest expense  21 Deriving Cash Flow from Accrual Financial Statements Operating – Income Tax Expense  Cash outflow related to income tax expense can be determined by looking at changes in the income tax payable account Figure 14-12 Determining cash outflow related to income taxes  22 Deriving Cash Flow from Accrual Financial Statements Investing  Cash inflows and outflows associated with investing activities are analyzed by looking at changes in the long-lived asset accounts  Outflows occur when assets are acquired Figure 14-13 Determining cash outflow for land purchases  23 Deriving Cash Flow from Accrual Financial Statements Investing (cont’d)  Cash inflows and outflows associated with investing activities are analyzed by looking at changes in the long-lived asset accounts  Inflows occur when assets are sold Figure 14-14 Determining cash inflow from sale of machinery  24 Deriving Cash Flow from Accrual Financial Statements Financing – Payment on Notes Payable  A pay down on a note payable would be to the payment of cash unless another transaction is indicated Figure 14-15 Determining cash outflow from payments on notes  25 Deriving Cash Flow from Accrual Financial Statements Financing – Issuance of Common Stock and Treasury Stock  Cash inflows from the issuance of common stock and treasury stock can be determined by looking at changes in the common stock, additional paid-in capital and treasury stock accounts (See Next Slide)  26 Figure 14-16 Determining cash inflow from stock  27 issuances Deriving Cash Flow from Accrual Financial Statements Financing – Cash Dividends  The cash dividend payment can be determined by looking at changes in the dividend payable account Figure 14-15 Determining cash outflow from dividend payments  28 The Direct Method Figure 14-18 Statement of cash flows for ABC Enterprises: Direct Method  29 The Indirect Method  To understand the adjustments to get from net income to Cash Flow from operations, we can classify the adjustments into various categories:   Noncash Changes to non current accounts Changes in current noncash accounts Figure 14-19 Statement of cash Flows: Indirect Method  30 The Indirect Method Figure 14-20 Explaining current adjustments to net income in the calculation of net cash provided (used) by operating activities  31 Analyzing the Statement of Cash Flows: An Application  Operating Activities may provide positive or negative cash flows regardless of net income (see ABC Enterprises Inc in previous slides) Remember that Operating Activities and the cash in this section are considered more sustainable  Cash must be evaluated over some time as any one period may mislead investors about longer term cash flow based on management’s decisions during that period – but manipulation of cash for long periods of time is very difficult  32 Copyright © 2014 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein  33 ... of the financial statements For example MCI acquired Satellite Business Systems (SBS) for common stock and a note payable and required disclosure  14 Deriving Cash Flow from Accrual Financial. .. accounts  Inflows occur when assets are sold Figure 14- 14 Determining cash inflow from sale of machinery  24 Deriving Cash Flow from Accrual Financial Statements Financing – Payment on Notes Payable.. .Chapter 14 Statement of Cash Flows  The Statement of Cash Flows Summary of company’s transactions that