Chapter 11 Statement of Cash Flows ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Purpose of the Statement of Cash Flows * Provides information about cash inflows and outflows during a period. * Provides information about cash changes between two balance sheet dates. * Discloses items that affect the balance sheet but don’t show up in the income statement. * Categorizes changes as operating, investing, or financing activities.

The Basic Structure of the Statement

Additional Disclosures In some cases, companies must also make one or both of the following two disclosures. Significant non-cash investing or financing activities Cash paid for interest and taxes 4

Preparing the Statement of Cash Flows Information for the statement of cash flows is collected from a variety of sources Preparing the statement of cash flows requires an examination of the changes in all non-cash accounts Therefore, in order to explain a company’s change in cash, you must explain the changes in the company’s noncash accounts. And to do that, you need the following three items: • A comparative balance sheet • An income statement • Additional information on changes in account balances

The Cash Change Equation Balance Sheet Equation Cash Change Equation Assets = Liabilities + Equity Cash + Non-Cash Assets = Liabilities + Equity Cash = Liabilities + Equity + Non-Cash Assets Change Change in Change in Change in in Cash = Liabilities + Equity - Non-Cash Assets 6

Three Classifications of Cash Flows Operations – cash flows related to selling goods and services; that is, the principle business of the firm. Investing – cash flows related to the acquisition or sale of noncurrent assets. Financing – long term and short term cash flows related to liabilities and owners’ equity; dividends are a financing cash outflow.

Direct and Indirect Method calculates cash flow from operations by subtracting cash disbursements to supplies, employees, and others from cash receipts from customers. Indirect method - calculates cash flow from operations by adjusting net income for noncash revenues and expenses. U.S. GAAP permits either the direct or the indirect method; a firm that presents the direct method must also show a reconciliation Most firms use this method. 8

Reporting Cash Flows from Operating Activities— Direct Method Operating activities include acquiring and selling products in the normal course of business. Different types of businesses will have different transactions that are included in cash flows from operating activities. 9

Types of Operating Inflows of Cash Operating Cash Inflows Into Company Sales to customers, Collection of cash from past sales that were made on credit, and Interest and dividends received. Company 10

Types of Operating Outflows of Cash Operating Cash Outflows from Company Purchases of merchandise for sale or materials to manufacture products, Payments for operating expenses, Interest on debt, and Payments for services and taxes. Company 11

Operating Activities - Direct Method Calculating Cash Received from Customers

Operating Activities - Direct Method Calculating Cash Paid for Inventory 13

Cash Paid for Operating Expenses Cash outflows for operating expenses + Increase in Payable or – Decrease in Payable Operating expenses = 14

Other Revenues and Expenses in the Operating Activities Section Two items ignored in the Operating Activities Section under the Direct Method Depreciation Gain/Loss on Sale of Equipment

Summary of Adjustments – Direct Method

Reporting Cash Flows from Operating Activities— Indirect Method Net Income + Non-cash expenses Increases in current liabilities Decreases in current assets - Increases in current assets Decreases in current liabilities Gains from investing & financing activities Loss from investing and financing activities = Cash flow from operating activities 17

Types of Investing Inflows of Cash Investing Cash Inflows Into Company Sale of property, plant, and equipment, The sale of securities (stocks and bonds) of other companies, and The receipt of loan payments. Company

Types of Investing Outflows of Cash Investing Cash Outflows from Company Purchases of property, plant, and equipment, Purchase of securities, and Making loans as investments. Company

Types of Financing Inflows of Cash Financing Inflows Into Company Selling Stock, Issuing Bonds, Contributions from owners, and Borrowing from banks on a long-term basis. Company

Types of Financing Outflows of Cash Financing Cash Outflows from Company Repayment of notes and bonds, Cash payments to repurchase stock (treasury stock), Payment of dividends. Company

Statement of Cash Flows for the Year Ending 12/31/2012 A Statement of Cash Flows (indirect method shown) concludes by adding the Change in Cash to the Beginning Cash balance to derive the Ending Cash balance. Hardin Supply Company Statement of Cash Flows for the Year Ending 12/31/2012 Net Income (amounts in thousands of dollars) $ 14 Depreciation and amortization expense 25 hhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhh Hhhhhhhhhh Cash flow from operating activities $ 35 Cash flow from investing activities (92) Cash flow from financing activities 30 Change in cash $(27) Cash, January 1, 2012 45 Cash, December 31, 2012 $ 18 The Company receives $100 Cash from a customer 22

The cash that remains is “free” to be used as the company chooses. Free Cash Flow The calculation starts with cash flows from operating activities, which is a measure of a company’s ability to generate cash from its current operations. It then subtracts capital expenditures, which refers to the cash that a company spends on fixed assets during the year, and dividends, which are payments to stockholders during the year. The cash that remains is “free” to be used as the company chooses.

Cash Flow Adequacy Ratio Cash flow adequacy ratio compares free cash flow to the average amount of debt maturing in the next five years and measures the ability to pay maturing debt. The 6.3 ratio indicates that Under Armour generated over $6.30 in free cash flow for every $1 of debt maturing in each of the next five years.

End of Chapter 11