Statement of Cash Flows What information? What information? –Cash lifeblood of organization –If not generate enough – not purchase inventory, not pay its employees, not pay dividends, not meet obligations, not stay in business  Interrelationships – sections, financial statements –Assets = liabilities + owner’s equity –Change in cash from beginning to end – HOW?

Statement of Cash Flows Cash flow from operations – most important Cash flow from operations – most important –Engine of company, principal source – internally –Residual amount – company’s operations –Day-to-day operations –Sale of goods, providing services –Cash sales, payment of cash for inventory, collection on accounts receivable, payment of an expense, payment of accounts payable

Statement of Cash Flows Cash flow from investments Cash flow from investments –Long-term assets –Purchase and sale of assets not held for resale –Making and collecting of loans to others –Negative – ok? - growing  Cash flow from financing –Capital structure –Stock, principle of loans, dividends paid

Direct Method Results of all transactions – cash amount received or paid – affect cash directly Results of all transactions – cash amount received or paid – affect cash directly

Indirect Method Calculated indirectly Calculated indirectly Relationship between current assets, current liabilities, revenues, and expenses Relationship between current assets, current liabilities, revenues, and expenses Takes out all transactions that do not affect cash – leaving cash transactions Takes out all transactions that do not affect cash – leaving cash transactions Accrual basis accounting – converts to cash basis accounting Accrual basis accounting – converts to cash basis accounting Changes in current assets and current liabilities, except cash Changes in current assets and current liabilities, except cash

Indirect Method Determining cash flows Determining cash flows –Net income + noncash expenses – increase in current asset + decrease in current asset + increase in current liability – decrease in current liability –Examples  NI - $30,000  Depreciation - $2,600  A/R – BI-$1,000, EI-$1,350  A/P – BI-$1,250, EI-$1,800  Inventory – BI-$6,000, EI-$5,000  Salaries Payable – BI-$1,250, EI-$750

Cash flow from Investing Cash generated or dispersed for the purchase or sale of long-term assets Cash generated or dispersed for the purchase or sale of long-term assets Negative amount usually indicated growth Negative amount usually indicated growth

Cash flow from Financing Cash generated or dispersed: Cash generated or dispersed: –Sale of stock –Long-term loan –Treasury stock –Dividends –Principle of loan, interest on loan – operating

Liquidity Ratios Pay current liabilities – timely manner Pay current liabilities – timely manner Current ratio – relationship – inflows of cash and demands for cash payments Current ratio – relationship – inflows of cash and demands for cash payments –Current assets / current liabilities  Quick ratio (acid test) – absolute liquidity – eliminate current assets that cannot be liquidated quickly –Most liquid of current assets / current liabilities  Working capital – dollar amount, not ratio –Current assets – current liabilities

Assign #11 - Liquidity Ratios for Target - Working Capital, Current Ratio, Quick Ratio years – ½ page – what do you think? Assign #11 - Liquidity Ratios for Target - Working Capital, Current Ratio, Quick Ratio years – ½ page – what do you think? Assign #12 – Statement of Cash Flows – Operating Section, Indirect Method – pg # 1 Assign #12 – Statement of Cash Flows – Operating Section, Indirect Method – pg # 1 Read: Read: –Chapter 7 – effectiveness ratios –Chapter 11 – Solvency ratios –Chapter 12 – Cash flows and liquidity ratios