Introduction to Financial Accounting Horngren | Sundem | Elliott | Philbrick 11e Chapter 5 Statement of Cash Flows

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Statement of Cash Flows  Reports a company’s cash receipts and cash payments during a particular period  Classifies them as financing, investing, and operating cash flows  Shows the performance of a company over a period of time  Explains why balance sheet items change  Explanation of changes in cash account 5-2

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Statement of Cash Flows  Show performance of companies over a period of time 5-3

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 1 Identify the Purposes of the Statement of Cash Flows

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Purposes of Cash Flow Statement  Helps understand relationship of net income to changes in cash balances  Reports past cash flows for:  Predicting future cash flows  Evaluating how management generates and uses cash  Determining firm’s ability to pay interest, dividends, and debts when due  Identifies changes in assets of a firm LO-1 5-5

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Cash Equivalents  Highly liquid short-term investments that a company can easily and quickly convert into cash  Examples include money market funds and Treasury bills LO-1 5-6

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 2 Classify Activities Affecting Cash as Operating, Investing, or Financing Activities

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Operating Decisions  Affect the major day-to-day activities that generate revenues and expenses  Cash flows from operating activities  First major section of the cash flow statement  Helps users evaluate the cash impact of management’s operating decisions  Operating activities: Transactions affecting purchase, processing, and selling of products and services LO-2 5-8

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Financing Decisions  Decisions concerned with whether and how to raise or repay cash  Cash flows from financing activities  Section of the statement of cash flows that helps users understand financing decisions LO-2 5-9

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Financing Decisions  Financing activities: Transactions that  Obtain resources by either of the following methods  Borrowing from creditors  Selling shares of stock  Use resources to for either of the following purposes  Repay creditors  Provide a return to shareholders LO

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Investing Decisions  Decisions that include the choices to:  Acquire or dispose of plant, property, equipment, and other long-term productive assets  Provide or collect cash as a lender or as an owner of securities LO

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Investing Decisions  Cash flows from investing activities  Section of the statement of cash flows that helps understand management’s investing decisions  Investing activities: Transactions that acquire or dispose of:  Long-lived assets  Securities that are not cash equivalents LO

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Effect of Exchange Rates on Cash  Applicable for companies with international operations  Appears on cash flow statement after the operating, investing, and financing activities  Not a cash flow but appears on the cash flow statement because it is:  Necessary for reconciliation of cash balances LO

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 3 Compute and Interpret Cash Flows from Financing Activities

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Cash Flows from Financing Activities  Determining cash flows to and from providers of capital involves:  Examining changes in cash account in balance sheet equation  Identifying changes associated with financing activities LO

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Cash Flows from Financing Activities  Examples of financing activities  Initial investment, $400,000  Loan from bank, $100,000  Cash flows from financing activities LO

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Cash Flows from Financing Activities Two general rules for financing activities LO In liabilities or paid-in capital In cash In liabilities or paid-in capital In cash

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 4 Compute and Interpret Cash Flows from Investing Activities

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Cash Flows from Investing Activities  Lists cash flows from the purchase or sale of:  Plant, property, equipment and other long- lived assets  Determined by looking at transactions that increase or decrease:  Long-lived assets, loans, or securities that are not considered cash equivalents. LO

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Cash Flows from Investing Activities  Cash flows from transaction of long-lived assets  Change in assets = Acquisitions − Disposals − Depreciation expense  Asset acquisitions and disposals involve cash  Depreciation is a non-cash expense LO

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Cash Flows from Investing Activities  Examples of investing activity  Acquire store equipment for cash, $15,000  Sale of asset for cash, $1,000 LO

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Two general rules for financing activities Purchase of long-lived assets, granting loans, and purchases of investments In cash Cash Flows from Investing Activities LO Sale of long-lived assets, collecting loans, and sales of investments In cash

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Noncash Investing and Financing Activities  Listed in separate schedule  Example of a company acquiring $8,000 of store equipment by issuing common stock LO

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Cash Flows from Operating Activities  Shows cash transactions affecting income statements  Two approaches under U.S. GAAP LO Direct method Operating cash collections (−) Operating cash disbursement Indirect method Adjusts net income to reflect actual cash receipts and cash disbursements

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 5 Use the Direct Method to Calculate Cash Flows from Operations

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Cash Flows from Operations — The Direct Method  Consists of a listing of cash receipts (inflows) and cash disbursements (outflows)  Constructed by examining cash column of balance sheet equation LO

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Cash Flows from Operations — The Direct Method  Example LO

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 8 Show How the Balance Sheet Equation Provides a Conceptual Framework for the Statement of Cash Flows

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. The Statement of Cash Flows and the Balance Sheet Equation  The balance sheet equation rearranged as  Any change in cash is accompanied by change(s) in items on right LO

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. The Statement of Cash Flows and the Balance Sheet Equation  Statement of cash flows focuses on changes in the noncash accounts to explain how and why level of cash changed  Changes in the accounts on the right side of the equation appear in the statement of cash flows:  When they involve the use or receipt of cash  Left side of the equation measures the net effect of the change in cash LO

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 9 Identify Free Cash Flow, and Interpret Information in Statements of Cash Flow

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. The Importance of Cash Flow  Statement of cash flows explains changes in cash account  Not changes in owners’ equity  Measures firm’s performance in maintaining strong cash position  Free cash flow: Net cash flow from operations less capital expenditures  Some also subtract dividends LO

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