chapter 12, slide #1 ch.12 statement of cash flows prof. j. wang

Chapter 12, Slide #1

Ch.12Statement of Cash Flows

Prof. J. Wang


• How to read statement of cash flows

• How to prepare statement of cash flows


Part IHow to read statement

of cash flows?


• How much cash did the company generate from its operations?

• Was the cash generated from its operations enough to pay for capital expenditures?

• Was the cash from operations, after paying for net capital expenditures, adequate to pay its shareholders’ dividends?


Free cash flows

• The amount of cash that remain after deduction net capital expenditure and dividends from cash from operations.

• If free cash flows are positive, it means that the company has met all its planned cash commitments and has cash available for expansion or reducing debt.


Part IIHow to prepare

statement of cash flows


Cash flows from operating activities:Inflows $ xxxOutflows (xxx)

Net cash provided (used) by operating activities $xxxCash flows from investing activities:

Inflows $ xxxOutflows (xxx)

Net cash provided (used) by investing activities xxxCash flows from financing activities:


Net cash provided (used) by financing activities xxxNet increase (decrease) in cash and cash equivalents $xxxCash and cash equivalents at beginning of year xxxCash and cash equivalents at end of year $xxx

Statement of Cash Flows Format

from balance sheets








1. Classification of cash flows

• Operating activities

• Investing activities

• Financing activities


Cash transactions

concerned with acquiring and

selling products and services

(income statement activities)

Payment of taxes

Collection of customer accounts

Payment to suppliersfor inventory

Payment of wages

Operating Activities


Cash transactions concerned with acquiring and

disposing of long-term assets

Purchase/sale ofanother company

Sale ofproperty, plant, and equipment

Capitalexpenditures

Investing Activities


Cash transactions

concerned with the raising and repayment of funds in the form of debt and equityIssuance/retirement

of bonds

Issuance/repaymentof bank note

Issuance/repurchaseof stock

A

FEDERAL RESERVE NOTE

THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

L70744629F

12

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ONE DOLLARONE DOLLAR

WASHINGTON, D.C.

THIS NOTE IS LEGAL TENDER

FOR ALL DEBTS, PUBLIC AND PRIVATE

SERIES

1985

H 293

Payment ofdividends

Payche

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Date

Dept.

of Tre

asurer

Jane D

oe

Financing Activities


Categorizing Cash Flow Activities

Current assetsand

current liabilities

Operating Activities

Long-term liabilities

or stockholders’

equity

Financing Activities

Long-term assets

Investing Activities


2. Methods to Report Cash from Operating Activities

Direct Method• Reports major classes

of gross cash receipts and cash payments

The amount of cash provided by

operating activities is the

same under both methodsIndirect Method

• Adjusts net income to remove the effect of all accruals and deferrals

LO4


Statement of Cash Flows Format







Only section of statement that differs in form between direct and indirect method (net cash flow total is the

same)


Direct methodCash flows from operations:

Cash collected from operations xxxLess: cash paid for operations

Purchase of inventory xxxSalaries xxxIncome taxes xxx

Interest expense xxx xxxNet cash provided/used by operations xxx

Start with the income statement and adjust for changes in current assets and liabilities

For example, to compute cash collected from sales:Sales + beginning A/R – ending A/R

OrSales +/- decrease/increase in A/R


Indirect method

Cash flows from operations:Net income xxxAdjustments to convert net income to cash flows

from operating activities:Add: non-cash expenses/losses xxxLess: non-cash gains xxx+/- decrease/increase in current assets xxx

+/- increase/decrease in current liab. xxx xxxNet cash provided/used by operations xxx


Cash flows from investing activities

• Examining the change in long-term assets

• Examine additional transaction information


Cash flows from financing activities

• Examining the change in long-term liabilities and shareholders’ equity

• Examine additional transaction information

chapter 12, slide #1 ch.12 statement of cash flows prof. j. wang

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