Download - Chapter 12
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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