Statement of Cash Flows

The cash flow statement helps users assess

1. Ability to generate future cash flows. 2. Ability to pay dividends and meet obligations. 3. Why net income is different from operating cash flows. 4. Cash investing and financing transactions.

Examples of Non-Cash Revenues and Expenses

1. Depreciation Expense 2. Losses 3. Gains 4. Ignored when using the direct method to calculate net cash provided by operating activities.

Direct Method (Operating)

1. FASB preferred but allows both methods 2. The net cash flow from operating activities as computed using the indirect method must also be reported in a separate schedule. 3. Lists each individual cash flow

Financing Cash Inflows

1. From sale of company's own stock to its stockholders 2. From borrowing money (bank loan)

Operating Cash Inflows

1. From sale of goods or services 2. From return on loans (interest received) and on equity securities (dividends received).

Indirect Method (Operating)

1. Is used extensively in practice 2. Most companies favor the indirect method because it is easier to prepare, focuses on the differences between net income and net cash flow from operating activities, and tends to reveal less company information to competitors. 3. The indirect method starts with net income and makes a series of adjustments to convert the accrual net income into cash net income.

Operating Activities

1. Section of the statement of cash flows includes the cash inflows and outflows related to the normal course of business operations. (The cash effect of transactions that create revenues and expenses and thus enter into the determination of net income). 2. Involve Income Statement Items

Financing Activities

1. Section of the statement of cash flows represents cash that is either paid to or received from owners and creditors. 2. Involve all interest-bearing liabilities, (both current and long-term) and stockholders' equity items

Investing Cash Outflows

1. To purchase property, plant, and equipment 2. To purchase investments in other entities 3. Making loans to other entities

Financing Cash Outflows

1. To stockholders as dividends 2. To creditors as the repayment of principal of funds borrowed (The interest payment would be considered an operating activity since it would effect net income).

Operating Cash Outflows

1. To suppliers for inventory 2. To employees for services 3. To government for taxes 4. To lenders for interest 5. To others for expenses

Current Liabilities

Accounts Payable, Salaries Payable, Interest Payable, and Income Taxes Payable

Current Assets

Accounts Receivable, Investments, Inventory, and Prepaid Expenses

Which income statement item does not have a cash effect?

Depreciation (called a non-cash expense).

Why does the indirect method add depreciation expense to calculate cash flows from operations?

Depreciation expense reduces the accrual basis net income as it is an expense. However, it has no effect on cash. Had cash accounting been used, no depreciation would be recorded. Thus, to convert net income from an accrual number to a cash number, you must add back depreciation.

Losses

Non-cash expense

Gains

Non-cash revenue

Investments

Represent both stock and bonds of other companies that we own as well as loans that we have made (lending money to customers).

Notes Payable

Represents amounts borrowed from creditors and thus would be classified as a financing activity.

Investing Activities

Section of the statement of cash flows includes the cash inflows and outflows related to the purchase and sale of long-term assets and investments.

How does the statement of cash flows differ from the other major financial statements?

The other financial statements are based on accrual accounting (the realization principle and the matching concept) whereas the cash flow statement simply shows all of the increases and decreases in cash.

Investing Cash Inflows

1. From sale of property, plant, and equipment 2. From sale of investments in other entities 3. From collection of principal on loans to other entities (Any interest received would be considered an operating activity since it would effect net income).

The cash flow statement reports

Cash receipts and cash payments from operating, financing, and investing activities.

Investments

Classified as an investing activity (this includes loans made by the company; notes receivable).

The major purpose of the operating activities section of the cash flow statement is to

Convert net income from an accrual basis to a cash basis.

Cash

Detailed by entire financial statement thus it would be incorrect to include it in any one section.

Long-term Assets

Include PPE and Intangibles

If the income statement reports sales revenue of $1 million, does that mean the company collected $1 million dollars from customers?

No. Sales could have been made on account.

The net cash provided (used) by operating activities

Represents what the net income of the company would have been had the company used a cash accounting basis rather than accrual accounting.

Statement of Cash Flows

Shows the changes in cash for the same period of time as that covered by the income statement. The cash flow statement shows all sources of cash and all of the uses of cash. Provides information about cash receipts (inflows) and cash payments (outflows).