PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon 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

12- 3 Operations Cash received and paid for day-to-day activities with customers, suppliers, and employees. Investing Cash paid and received from buying and selling long-term assets. Financing Cash received and paid for exchanges with lenders and stockholders. Business Activities and Cash Flows The Statement of Cash Flows focuses attention on:

12- 4 Cash Checking and Savings Accounts Cash Equivalents Highly liquid short-term investments within three months of maturity. Business Activities and Cash Flows Currency

12- 5 UNDER ARMOUR, INC. Statement of Cash Flows For the Year Ended December 31, 2010 (in millions) Net cash provided (used) by operating activities Net cash provided (used) by investing activities Net cash provided (used) by financing activities Net Change in Cash and Cash Equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year $ 37 (41) $ 190 Classifying Cash Flows

12- 6 Cash inflows and outflows that directly relate to revenues and expenses reported on the Income Statement. Operating Activities

12- 7 Under Armour’s 2010 Investing Activities Investing Activities

12- 8 Under Armour’s 2010 Financing Activities Financing Activities

12- 9 Relationships Between Classified Balance Sheet and Statement of Cash Flow (SCF) Categories

Direct and Indirect Reporting of 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

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 Income by analyzing noncash items.

Use this table when adjusting Net Income to operating cash flows using the indirect method. Relationships to the Balance Sheet and the Income Statement Change in account balances during the year

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.

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

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.

Overall Patterns of Cash Flows

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

Depreciation Expense Loss on Sale of 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 Sale of PPE Reporting Sales of Property, Plant, and Equipment (PPE) (Indirect)

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

T-account Approach(Indirect Method)

End of Chapter 12