Slide 12-1

12
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Reporting and Analyzing Cash Flows

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Slide 12-2

Importance of Cash Flows

How did the business fund its operations? Does the business have sufficient cash to pay its debts as they mature?

Did the business make any dividend payments?

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Did the business borrow any funds or repay any loans?

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Slide 12-3

Measuring Cash Flows

Cash Equivalents

Cash

Currency

Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by interest rate changes.
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Slide 12-4

Classifying Cash Flows

The Statement of Cash Flows includes the following three sections: Operating Activities Investing Activities Financing Activities

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Slide 12-5

Operating Activities
Inflows

Receipts from customers. Cash dividends received. Interest from borrowers. Other.

Outflows

Salaries and wages. Payments to suppliers. Taxes and fines. Interest paid to lenders. Other.
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Slide 12-6

Investing Activities
Inflows

Selling long-term productive assets. Selling equity investments. Collecting of principal on loans. Other.

Outflows

Purchase long-term productive assets. Purchase equity investments. Purchase debt investments. Make loans.

Cash Flows from Investing Activities

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Slide 12-7

Financing Activities
Inflows

Issuing its own equity securities. Issuing bonds and notes. Issuing short-term and longterm liabilities.

Outflows

Pay dividends to stockholders. Purchase treasury stock. Repay cash loans. Cover withdrawals by owners.

Cash Flows from Financing Activities

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Slide 12-8

Exh. 12.4

Noncash Investing and Financing

Items requiring separate disclosure include: Retirement of debt by issuing equity stock. Conversion of preferred stock to common stock. Lease of assets in a capital lease transaction. Purchase of long-term asset by issuing a note or bond. Exchange of noncash assets for other noncash assets. Purchase of noncash assets by issuing equity or debt.

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Slide 12-9

Exh. 12.5

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: [List of individual inflows and outflows] Net cash provided (used) by investing activites Cash flows from financing activities: [List of individual inflows and outflows] 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
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$ #####

#####

##### $ ##### ##### $ #####

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Slide 12-10

Exh. 12.5

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: There are two acceptable methods to determine Cash [List of individual inflows and outflows] Flows from Operating Activities: Net cash provided (used) by investing activites ##### Cash flows from financing activities: Direct Method [List of individual inflows and outflows] Indirect Method 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 $ #####
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Slide 12-11

Analyzing Noncash Accounts

The changes in cash can be determined by analyzing the noncash accounts on the balance sheet. D Cash = D Liabilities + D Stockholders Equity - D Noncash Assets
Derives from . . .

Assets = Liabilities + Stockholders Equity

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Slide 12-12

Lets look at the Direct Method for preparing the Cash Flows from Operating Activities section.
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Slide 12-13

Exh. 12.12

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

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Slide 12-14

Exh. 12.13

Direct Method Cash Paid for Merchandise

Step 1
Purchases = COGS

+ Increase in inventory - Decrease in inventory

Step 2
= Purchases

Cash paid for merchandise

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+ Decrease in A/P - Increase in A/P

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Slide 12-15

Exh. 12.14

Direct Method Wages and Operating Expenses

The cash paid for wages and other operating expenses is affected by (1) whether the expense was prepaid, and (2) whether the expense was accrued.
Cash paid for wages and other operating expenses
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Wages and other = operating expenses

+ Increase in

prepaid expenses

- Decrease in
prepaid expenses

+ Decrease in

accrued liabilities

- Increase in
accrued liabilities

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Slide 12-16

Exh. 12.15

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 Tax = Expense

+ Decrease in taxes payable - Increase in taxes payable

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Slide 12-17

Direct Method Depreciation, Amortization, and Depletion Expense

Operating cash flows are not involved. They are not disclosed in the Statement of Cash Flows using the direct method.

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Slide 12-18

Direct Method Gains and Losses

Gains and losses do not appear on the Statement of Cash Flows using the Direct Method.
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Slide 12-19

Lets look at the Indirect Method for preparing the Cash Flows from Operating Activities section.
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Slide 12-20

Indirect Method of Reporting Operating Cash Flows

Changes in current assets and current liabilities.

Net Income
+ Losses and - Gains + Noncash expenses such as depreciation and amortization.

Cash Flows from Operating Activities

97.5% of all companies use the indirect method.

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Slide 12-21

Indirect Method of Reporting Operating Cash Flows

Change in Account Balance During Year Increase Decrease Subtract from net Add to net income. income. Add to net income. Subtract from net income.

Current Assets Current Liabilities

Use this table when adjusting Net Income to Operating Cash Flows.
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Slide 12-22

Indirect Method Operating Activities Example

East, Inc. reports $125,000 net income for the year ended December 31, 2002. Accounts Receivable increased by $7,500 during the year and Accounts Payable increased by $10,000. During 2002, East reported $12,500 of Depreciation Expense. What is East, Inc.s Operating Cash Flow for 2002?
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Slide 12-23

Indirect Method Operating Activities Example

Net income $ 125,000

For the indirect method, start with net income.

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Slide 12-24

Indirect Method Operating Activities Example

Net income Add: Depreciation expense $ 125,000 12,500

Add noncash expenses such as depreciation, depletion, amortization, or bad debt expense.

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Slide 12-25

Indirect Method Operating Activities Example

Net income Add: Depreciation expense Deduct: Increase in accounts receivable
Change in Account Balance During Year Increase Decrease Subtract from net Add to net income. income. Add to net income. Subtract from net income.
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125,000 12,500 (7,500)

Current Assets Current Liabilities

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Slide 12-26

Indirect Method Operating Activities Example

Net income Add: Depreciation expense Deduct: Increase in accounts receivable Add: Increase in accounts payable
Change in Account Balance During Year Increase Decrease Subtract from net Add to net income. income. Add to net income. Subtract from net income.
The McGraw-Hill Companies, Inc., 2003

125,000 12,500 (7,500) 10,000

Current Assets Current Liabilities

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Slide 12-27

Indirect Method Operating Activities Example

Net income Add: Depreciation expense Deduct: Increase in accounts receivable Add: Increase in accounts payable Cash provided by operating activities $ 125,000 12,500 (7,500) 10,000 140,000

If we used the Direct Method, we would get the same $140,000 for Cash Provided by Operating Activities.
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Slide 12-28

Lets do a complete Statement of Cash Flows using the Indirect Method.

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Slide 12-29

Statement of Cash Flows Indirect Method

Prepare a Statement of Cash Flows for the period ending December 31, 2002 using the Indirect Method.

Refer to the following information . . .

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Slide 12-30

B&G Company Comparative Balance Sheets December 31 Increase or (Decrease)

2002 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
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2001

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

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Slide 12-31

Additional Information for 2002:

Net

income was $105,000. Cash dividends declared and paid were $40,000. Bonds payable of $50,000 were redeemed for $50,000 cash. Common stock was issued for $35,000 cash. Sold land for $25,000 at no gain or loss. Purchased $70,000 of equipment.

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Slide 12-32

B&G Company Statement of Cash Flows For the Year Ended December 31, 2002 Cash flows from operating activities Net income Adjustments to accrual-basis net income:

105,000

Add noncash expenses and losses. Subtract noncash revenues and gains.

Start with accrual-basis net income.

Then, analyze the changes in current assets and current liabilities.

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Slide 12-33

B&G Company Statement of Cash Flows For the Year Ended December 31, 2002 Cash flows from operating activities Net income $ Adjustments to accrual-basis 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

105,000

36,000 141,000

Current Assets Current Liabilities

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Change in Account Balance During Year Increase Decrease Subtract from net Add to net income. income. Add to net income. Subtract from net income.
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Slide 12-34

B&G Company Statement of Cash Flows For the Year Ended December 31, 2002 Cash flows from operating activities Net income $ Adjustments to accrual-basis 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

105,000

36,000 141,000

Now, lets complete the investing section.

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Slide 12-35

B&G Company Statement of Cash Flows For the Year Ended December 31, 2002 Cash flows from operating activities Net income $ Adjustments to accrual-basis 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 Proceeds from sale of land 25,000 Purchase of equipment (70,000) Net cash used by investing activities Cash flows from financing activities

105,000

36,000 141,000

(45,000)

Now, lets complete the financing section.

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Slide 12-36

B&G Company Statement of Cash Flows For the Year Ended December 31, 2002 Cash flows from operating activities Net income $ Adjustments to accrual-basis 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 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, 2002 Cash, December 31, 2002 $

105,000

36,000 141,000

(45,000)

(55,000) 41,000 22,000 63,000

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Slide 12-37

Exh. 12.19

Analyzing Cash Sources and Uses

Cash Flows of Competitors
all numbers in thousands Cash provided (used) by operating activities Cash provided (used) by investing activities: Proceeds from sale of operating assets Purchase of operating assets Cash provided (used) by financing activities: Proceeds from issuance of debt Repayment of debt Net increase (decrease) in cash
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Fisher $ 90,000 $

Sprint 40,000 $

Tektron (24,000)

26,000 (48,000) (25,000)

13,000 $ (27,000) 15,000 $ 15,000 $ 15,000

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Slide 12-38

Exh. 12.20

Cash Flow on Total Assets

Used, along with income-based ratios, to assess company performance.

Cash Flow on Total Assets

Operating cash flows Average total assets

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Slide 12-39

End of Chapter 12

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