PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA

Cynthia J. Rooney, Ph.D., CPA

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 12

Statement of Cash Flows

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OperationsCash received and paidfor day-to-day activities

with customers, suppliers,

and employees.Investing

Cash paid and receivedfrom buying and

sellinglong-term assets.

FinancingCash received and paid

for exchanges withlenders and

stockholders.

Business Activities and Cash Flows

The Statement of Cash Flows focuses

attention on:

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CashChecking and Savings Accounts

Cash EquivalentsHighly liquid short-term

investmentswithin three months of

maturity.

Business Activities and Cash Flows

Currency

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UNDER ARMOUR, INC.Statement of Cash Flows

For the Year Ended December 31, 2010

(in millions)Net cash provided (used) by operating activitiesNet cash provided (used) by investing activitiesNet cash provided (used) by financing activitiesNet Change in Cash and Cash EquivalentsCash and cash equivalents, beginning of yearCash and cash equivalents, end of year

$ 37

(41)

7

3

187

$ 190

Classifying Cash Flows

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Cash inflows and outflows that directly relate to revenues and expenses reported on the

Income Statement.

Operating Activities

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Under Armour’s 2010 Investing Activities

Investing Activities

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Under Armour’s 2010 Financing Activities

Financing Activities

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Relationships Between Classified Balance Sheet and Statement of Cash Flow (SCF) Categories

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Direct and Indirect Reportingof Operating Cash Flows

We will concentrate on the indirect method for now, and we

will look at the direct method again later in the chapter.

Same result

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Cash Flows from Operating Activities - Indirect Method

Net Income

Cash Flows from

Operating Activities -

Indirect Method

Changes in Current Assets and Current

Liabilities.

+ Losses and - Gains

+ Noncash expenses such as Depreciation

and Amortization.

The indirect method adjusts Net Incomeby analyzing noncash items.

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Use this table when adjusting Net Income to operating cash flows using the indirect

method.

Current Assets Current LiabilitiesSubtract from Add tonet income. net income.

Add to Subtract fromnet income. net income.

Increase

Decrease

Relationships to the Balance Sheet and the Income Statement

Change in accountbalances during the year

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Evaluating Operating Cash Flows• Operating cash flows must

be positive over the long-run for a company to be successful.

• An upward trend in operating cash flows over time indicates growth and efficient operations.

• Look at the relationship between operating cash flows and Net Income.

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Evaluating Investing Cash Flows

• Healthy companies tend to show negative cash flows in the investing activities section.

• Be cautious over a positive total cash flow in the investing activities section

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Evaluating Financing Cash Flows

• It’s not possible to evaluate the company’s financing cash flows by simply determining whether they are positive or negative on an overall basis.

• Instead, consider detailed line items with this section to assess the company’s overall financing strategy.

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Overall Patterns of Cash Flows

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Reporting Operating Cash Flows with the Direct Method

Provides more detailed

information

Identifies cash inflows and

outflows relationships

Prepared by adjusting

accrual basis to cash basis

Investing and financing

sections for the two methods are

identical

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Depreciation Expense

Loss on Saleof PPE

A loss on the sale of PPE is added back to Net Income just

as Depreciation Expense is added back. Adding these noncash items restores Net

Income to what it would have been had Depreciation and the loss not been subtracted at all.

Just the opposite is true for a gain on the sale of PPE.

Subtracting the gain reverses the effect of the gain having been added to Net Income.

Gain on Saleof PPE

Reporting Sales of Property, Plant, and Equipment (PPE) (Indirect)

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Instead of creating schedules for each section of the Statement of Cash

Flows, some prefer to prepare a single large T-account to represent the changes that have taken place in Cash subdivided into the three sections of

the Statement of Cash Flows.

T-account Approach (Indirect Method)

T

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T-account Approach(Indirect Method)

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End of Chapter 12