1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. FINANCIAL ACCOUNTING 2 ND EDITION BY DUCHAC, REEVE, & WARREN 13 Statement of Cash Flows

2 CASH FLOW STATEMENT 3 sections reporting cash flows from different activities –Cash flows from operating activities –Cash flows from investing activities –Cash flows from financing activities 3 sections reporting cash flows from different activities –Cash flows from operating activities –Cash flows from investing activities –Cash flows from financing activities LG 1

3 CASH FLOWS: Investing Activities Cash inflows from investing activities arise from –Selling fixed assets, investments, intangible assets Cash outflows from investing activities arise from –Buying fixed assets, investments, intangible assets Cash inflows from investing activities arise from –Selling fixed assets, investments, intangible assets Cash outflows from investing activities arise from –Buying fixed assets, investments, intangible assets LG 1

4 NONCASH ACTIVITIES Arise from investing, financing activities –Examples Issue stock to retire long-term debt Issue stock, debt in exchange for fixed asset –Has no direct effect on cash flows –Disclosed in separate schedule LG 1

5 CASH FLOWS: Direct Method Direct method –Reports operating cash flows as sources, uses of cash –Adjusts certain income statement items for changes in current assets, liabilities Direct method –Reports operating cash flows as sources, uses of cash –Adjusts certain income statement items for changes in current assets, liabilities LG 3

6 DIRECT METHOD: Cash Received from Customers Sales adjusted for change accounts receivable LG 3

7 DIRECT METHOD: Cash Paid for Inventory Cost of inventory adjusted for changes in inventory & accounts payable LG 3

8 DIRECT METHOD: Cash Paid for Operating Expenses Operating expenses adjusted for changes in accrued expenses LG 3

9 DIRECT METHOD: Cash Paid for Income Tax Income tax expense adjusted for changes in taxes payable LG 3

10 EXHIBIT 8 LG 3

11 CASH CONVERSION CYCLE Cash conversion cycle –Measures the cycle of Buying inventory Paying for inventory (account payable) Selling inventory Collecting account receivable LG 4

12 CASH CONVERSION CYCLE: Equation Days’ sales in A/R = A/R / Ave daily net Sales + Days’ sales in inventory = Ave. Inv. / Ave CGM - Days’ sales in A/P = Ave. A/P / Ave CGM LG 4

13 CASH CONVERSION CYCLE: Calculation AppleDell # Days’ Sales Receivables3430 Inventory54 Accounts Payable Conversion Cycle ? LG 4

14 ANALYSIS: Cash Conversion Cycle The more positive the conversion cycle, the less efficient the operations –Reduces amount of noncash current assets –Increases level of current liabilities –Releases cash for other purposes Negative cycles indicate highly efficient use noncash working capital The more positive the conversion cycle, the less efficient the operations –Reduces amount of noncash current assets –Increases level of current liabilities –Releases cash for other purposes Negative cycles indicate highly efficient use noncash working capital LG 4

15 Inspiration of the Day "To do carefully and constantly and kindly many little things is not a little thing" - Author Unknown