Statement of Cash Flows answers questions such as: Is the company generating sufficient positive cash flows from its ongoing operations to remain viable? Will the company be able to meet its financial obligations to creditors? Will the company be able to pay its customary cash dividend? Why is there a difference between net income and net cash flow for the year? To what extent will the company have to borrow money in order to make needed investments?

Statement of Cash Flows Reports the Cash Effects of an enterprise’s operations (through CA & CL generally) its investing transactions (LT Assets) its financing transactions (LT Liabilities & Owners’ Equity) Should Reconcile Net Income to Net Cash Flow from operating activities Should report significant noncash investing & financing transactions Cash includes both cash & cash equivalents

Cash Flows Cash Increases in Cash Decreases in Cash Operating (receipts from revenues) (payments for expenses) Cash Investing Investing (receipts from sales of noncurrent assets) (payments for aquiring noncurrent assets) Financing Financing (receipts from issuing equity and debt securities) (payments for dividends, and redemption of debt securities)

Statement of Cash Flows: Investing Activities Cash Received From: Collection of principal from debtors Sale of loans to third parties Sale of debt or equity securities of other entities Returns of investment in those investments Sale of property, plant & equipment Cash Paid For: Loans made or purchased by the entity Purchase of debt or equity securities of other entities Purchase of property, plant & equipment

Statement of Cash Flows: Financing Activities Cash Received From: Issuance of equity securities (stock) Issuance of bonds, mortgages, notes & other short-term or long-term borrowings Cash Paid For: Cash dividends Purchase of treasury stock Repayment of principal on amounts borrowed, including capital lease obligations

Statement of Cash Flows: Operating Activities Cash Received From: Producing & selling goods Providing services Interest Dividends Other (includes sale of investments in trading portfolio) Cash Paid For: Inventory Salaries & wages Taxes, duties, fines, fees, penalties Other (includes purchase of investments in trading portfolio)

Noncash: Investing & Financing Activities Acquiring an asset through a capital lease Conversion of debt to equity Exchange of noncash assets or liabilities for other noncash assets or liabilities Issuance of stock to acquire assets

Statement of Cash Flows: Direct vs. Indirect Methods Requires a supplemental reconciliation of net income to cash flow from operating activities. Net income is reconstructed on a cash basis. Used by 2.5% of companies. Indirect Method No supplemental schedule is required. Net income is reconciled to cash flow from operating activities. Used by 97.5% of companies. 31

Accounts Receivable Beginning Balance + Net Credit Sales - Net Cash Collected from Customers -A/R written off = Ending Balance

Accounts Payable Beginning Balance + COGS (net of Factory Depreciation & Amortization) + Ending Inventory - Beginning Inventory - Net Cash Paid to suppliers = Ending Balance

Accrued Expenses Payable Beginning Balance + Operating Expenses - Cash Paid for Operating Expenses - Depr. & Amortization - Beg. Prepaid Expense + Ending Prepaid Expenses = Ending Balance

Statement of Cash Flows: Indirect Method CASH FLOW FROM OPERATING ACTIVITIES: Net Income + “Non-cash” Expenses - “Non-cash” Revenues - Increases in Current Assets + Decreases in Current Assets - Decreases in Current Liabilities + Increase in Current Liabilities +/- Losses & Gains Reported on the Income Statement = Net Cash Flow from Operating Activities CASH FLOW FROM INVESTING ACTIVITIES: + Net Decrease in all other Long Term Assets - Net Increase in all other Long Term Assets = Net Cash Flow from Investing Activities CASH FLOW FROM FINANCING ACTIVITIES: + Net Decrease in all other LT Liabilities & Equities - Net Increase in all other LT Liabilities & Equities = Net Cash Flow from Financing Activities Statement of Cash Flows: Indirect Method 31

“Ada” Memory Tool Asset Decreases -- Add to Income

Prepare a Statement of Cash Flows: Indirect Method using a worksheet

Interpretation of the Statement of Cash Flows Examine the operating activities section carefully. Negative cash flow is usually a sign of fundamental difficulties. Ultimately, a positive cash flow is necessary to avoid liquidating assets or borrowing money to pay for day-to-day activities. 32

DIRECT METHOD STATEMENT OF CASH FLOWS Cash flows from operating activities Cash collections from Customers Less: Cash paid for merchandise Less: Cash paid for operating expenses Less: Cash paid for income taxes Net cash provided by operating activities CASH FLOW FROM INVESTING ACTIVITIES: Plus cash received from acquiring Long Term Assets Less cash paid from selling Long Term Assets = Net Cash Flow from Investing Activities CASH FLOW FROM FINANCING ACTIVITIES: Plus cash received from securing LT Liabilities & Equities Less cash paid to reduce LT Liabilities & Equities = Net Cash Flow from Financing Activities Net increase in cash Cash, BOY Cash, EOY DIRECT METHOD STATEMENT OF CASH FLOWS

Accounts Receivable Direct Method: Beginning Balance Finding Cash Collected from Customers Accounts Receivable Beginning Balance + Net Credit Sales - Net Cash Collected from Customers -A/R written off = Ending Balance Cash Collected from Customers = Net Sales Direct Method: + Decrease in A/R - Increase in A/R

Accounts Payable Direct Method: Beginning Balance Finding Cash Paid to Suppliers Accounts Payable Beginning Balance + COGS (net of Factory Depreciation & Amortization) + Ending Inventory - Beginning Inventory - Net Cash Paid to suppliers = Ending Balance Cash Payments to Suppliers = COGS Direct Method: + Incr in Inventory - Decr in Inventory + Decrease in A/P - Increase in A/P

Accrued Expenses Payable Finding Cash Paid for Operating Expenses Accrued Expenses Payable Beginning Balance + Operating Expenses - Cash Paid for Operating Expenses - Depr. & Amortization - Beg. Prepaid Expense + Ending Prepaid Expenses = Ending Balance Cash Payments for Operating Expenses = Operating net of depreciation Direct Method: + Increase in Prepaid Expenses - Decrease in Prepaid Expenses + Decrease in Accrued Expenses - Increase in Accrued Expenses