Chapter 13 Statement of Cash Flows (SCF)

A required financial statement Reconciles beginning cash to ending cash (shows cash inflows and cash outflows) Converts accrual accounting income statement to cash basis Statement of Cash Flows

Why Report the Causes of the Changes in Cash?

Back out accruals
Accruals may be relevant, but they also introduce uncertainty into financial statements. Accruals often involve estimates that can be manipulated by management to achieve earnings targets.

Detail sources and uses of cash Highlight possible future cash flow and credit problems

Why is the SCF Important?

How much cash is generated by operations? Is enough cash generated to fund operations and replace plant and equipment? Can debt be paid? Are sources of financing changing?

Categories of Cash Flows

The SCF must include the following sections: 1. Cash Flows from Operating Activities
Direct Method (preferred but rarely used) Indirect Method (used by 99% of companies)

2. Cash Flows from Investing Activities 3. Cash Flows from Financing Activities Also, disclose noncash investing and financing activities

Cash Flows from Operating Activities

The cash effects of transactions that create revenues and expenses and enter into determination of net income -- current assets and
liabilities (except investments & short term borrowings) Inflows include:
Cash receipts from customers Dividends and Interest on Investments

Outflows include:
Payments to suppliers Interest paid on liabilities Salary and wages paid to employees Cash paid for income taxes

Cash Flows from Investing Activities

Cash inflows and outflows that are related to the purchase and sale of productive assets -- Long-term Assets (and short-term investments) Inflows include proceeds from:
Sales of PP&E Sales of Investments in securities Cash received from collection of loan (principal only)

Outflows include payments for:

The purchase of PP&E The purchase of long-term investments

Cash Flows from Financing Activities

Cash inflows and outflows that are related to how cash was obtained to finance the enterprise -- Long-term Liabilities (and short-term borrowings) and Stockholders Equity Inflows include:
Proceeds from the sale of stock Proceeds from the sale of bonds Proceeds from borrowings (loans)

Outflows include:
Payments to purchase Treasury Stock Principal payments to creditors (not interest) Dividends paid to stockholders

Operating Activities - Clarification

Some cash flows that seem to relate to investing or financing activities are classified as operating activities Receipts of investment revenue (interest and dividends) Payments of interest to lenders are classified as operating activities because these items are reported in the income statement.

Significant Noncash Activities

Investing and financing activities that do not involve cash, such as . . .
Retirement of bonds by issuing stock Settlement of debt by transferring assets Issuance of debt to purchase assets

must be disclosed in a separate schedule at the bottom of the SCF or in a separate footnote or supplementary schedule to the financial statements.