1. 3 Days of Accounting :D..
Wednesday AM Introduction Wednesday PM Income Statement Thursday AM Balance Sheet Thursday PM Cash Flow Statement Friday AM Practical Exam & Conclusion

2. Why Cash Flow is Important: An Example

3. Why Cash Flow is Important: An Example
The company reported rising amounts of net income.
The company failed to generate any cash from its operations.
These deficits were offset by borrowings.
The company went bankrupt in 2008.

4. Why Cash Flow is Important: An Example
It is possible for a company to post a healthy net income but not have cash needed to pay its employees, suppliers, and bankers.
Positive net income on the income statement is ultimately insignificant unless a company can translate its earnings into cash.

5. Why Cash Flow is Important: An Example
The statement of cash flows:
provides information about cash inflows and outflows during an accounting period and over time and
is extremely important as an analytical tool.

6. Why Cash Flow is Important: An Example
Cash flows are segregated by:
operating activities,
investing activities, and
financing activities.

7. Statement of Cash Flows: Basic Principle
The statement of cash flows is another way of presenting the balance sheet of the company.
The balance sheet shows amounts at the end of the accounting period.
The statement of cash flows shows changes in the balance sheet accounts between periods.

8. Statement of Cash Flows: Basic Principle
Change in cash between periods is explained by changes in all other balance sheet accounts.
Each balance sheet account is related either to an operating activity, an investing activity, or a financing activity.
Change in cash between periods is equal to cash flow from operating activities, investing activities, or financing activities.

9. Statement of Cash Flows: Basic Principle

10. Statement of Cash Flows: Basic Principle
Cash account increased by $1,299 million between November 30, 2006 and 2007.
Operations used cash (net outflow) of $45,945 million.
Investing activities used cash (net outflow) of $1,698 million.
The company borrowed (net inflow) $48,592 million.
The company borrowed to cover the cash deficit in operations and capital expenditures.

11. Preparing a Statement of Cash Flows
Begins with a return to the balance sheet
Requires reordering of the information presented on a balance sheet
Shows changes over time rather than the absolute dollar amount of the accounts at a point in time

12. Preparing a Statement of Cash Flows

13. Preparing a Statement of Cash Flows
Four parts of a statement of cash flows
Cash
Operating activities
Investing activities
Financing activities

14. Preparing a Statement of Cash Flows
Cash includes:
cash
highly liquid short-term marketable securities (cash equivalents)
short-term investments

15. Preparing a Statement of Cash Flows
Operating activities include:
delivering or producing goods for sale
providing services
cash effects of transactions and other events that enter into the determination of income

16. Preparing a Statement of Cash Flows
Investing activities include:
acquiring and selling or otherwise disposing of:
securities that are not cash equivalents
productive assets that are expected to benefit the firm for long periods
lending money and collecting on loans

17. Preparing a Statement of Cash Flows
Financing activities include:
borrowing from creditors and repaying principal
obtaining resources from owners and providing them with a return on the investment

18. Preparing a Statement of Cash Flows
Prepared by:
calculating changes in all of the balance sheet accounts, including cash,
listing the changes in all of the accounts except cash as inflows or outflows, and
categorizing the flows by operating, financing, or investing activities.
The inflows less the outflows balance to and explain the change in cash.

19. Preparing a Statement of Cash Flows

20. Preparing a Statement of Cash Flows
The next step is to transfer the account changes to the appropriate area of a statement of cash flows.
In doing so, a determination must be made of what constitutes an inflow and what constitutes an outflow.

21. Preparing a Statement of Cash Flows

22. Preparing a Statement of Cash Flows
Exhibit 4.2 (Inflows)
Decrease in other assets
Increase in long-term debt
Increase in common stock and additional paid-in capital
(Outflows)
Increase in inventories
Decrease in notes payable

23. Preparing a Statement of Cash Flows
Accumulated depreciation
appears in the asset section
is actually a contra-asset
reduces the amount of total assets
shown in parentheses on the balance sheet
has the same effect as a liability account

24. Preparing a Statement of Cash Flows
Other complications
Two transactions in one account
Multiple transactions affecting other accounts

25. Calculating Cash Flow from Operating Activities
Operating activities represent cash generated internally.
Investing and financing activities provide cash from external sources.

26. Calculating Cash Flow from Operating Activities
Firms may use one of two methods to calculate cash flow from operating activities:
Direct Method
Indirect Method
Direct and indirect methods yield identical figures for net cash flow from operating activities.

27. Calculating Cash Flow from Operating Activities
The direct method shows:
cash collection from customers
interest and dividends collected
other operating cash receipts
cash paid to suppliers
interest paid
taxes paid
other operating cash payments

28. Calculating Cash Flow from Operating Activities
The indirect method starts with net income and adjusts for:
deferrals
accruals
noncash items
nonoperating items

29. Calculating Cash Flow from Operating Activities

30. Calculating Cash Flow from Operating Activities

31. Cash Flow from Investing Activities
Additions to property, plant, and equipment represent a cash outflow of $14.1 million.
Decrease in other assets represents a cash inflow of $295 thousand.

32. Cash Flow from Financing Activities
Sage Inc. issued new shares of stock during 2013.
The total cash generated from stock sales amounted to $256 thousand.

33. Cash Flow from Financing Activities
Short-term debt and current maturities of long-term debt jointly explain Sage Inc.’s net reduction in short-term borrowings:

34. Cash Flow from Financing Activities
Long-term borrowings should be segregated into two components
Additions to long-term borrowings
Reduction of long-term borrowings
Additions to long-term borrowings and reductions of long-term borrowings on the Sage Inc. statement of cash flows reconcile the change in the long-term debt account on the balance sheet.

35. Cash Flow from Financing Activities

36. Cash Flow from Financing Activities
Change in retained earnings results from net income recognition and the payment of cash dividends.
Payment of cash dividends is financing outflow.
Declaration of a cash dividend would not affect cash.
This information is provided in the Sage Inc. Statement of Stockholders’ Equity.

37. Cash Flow from Financing Activities

38. Change in Cash
In 2013, net cash provided by operating activities, less the net cash used by investing activities, plus the net cash provided by financing activities produced a net decrease in cash and cash equivalents for Sage Inc.:

39. Preparing a Statement of Cash Flows

40. Change in Cash
The cash flows provided (used) by operating, investing, and financing activities vary considerably depending on:
the company,
its performance,
its ability to generate cash,
its financing and investing strategies, and
its success in implementing financing and investing strategies.

41. Analyzing the Statement of Cash Flows
The statement of cash flows helps to determine a firm’s:
ability to generate cash flows in the future,
capacity to meet cash obligations,
future external financing needs,
success in productively managing investing activities, and
effectiveness in implementing financing and investing strategies.

42. Analyzing the Statement of Cash Flows
Cash Flow from Operations
It is possible for a firm to be highly profitable and
not be able to pay dividends
not be able to invest in new equipment
not be able to service debt
go bankrupt

43. Analyzing the Statement of Cash Flows
Cash Flow from Operations
Ongoing operation depends on success in generating cash from operations.
Firms need cash to satisfy creditors and investors.
Temporary shortfalls of cash can be satisfied by borrowing or other means, but ultimately a firm must generate cash.

44. Analyzing the Statement of Cash Flows
Cash Flow from Operations
Periods of high interest rates and inflation contributed to the enhanced attention paid to cash flow by investors and creditors.
When interest rates are high, the cost of borrowing can be out of reach for many firms seeking to cover temporary cash shortages.
Periods of inflation distort the meaningfulness of net income.

45. Sage Inc.: Analysis of the Statement of Cash Flows
An analysis of the statement of cash flows should cover the following areas:
Analysis of cash flow from operating activities
Analysis of cash inflows
Analysis of cash outflows

46. Sage Inc.: Analysis of the Statement of Cash Flows
Cash Flow from Operating Activities
The statement of cash flows provides the “net cash flow from operating activities.”
The analyst should be concerned with:
the success or failure of generating cash from operations
the underlying causes of operating cash flow
the magnitude of operating cash flow
fluctuations in cash flow from operations

47. Sage Inc.: Analysis of the Statement of Cash Flows

48. Sage Inc.: Analysis of the Statement of Cash Flows
Cash Flow from Operating Activities – Sage Inc.
Negative cash flow from operations in 2012
Positive net income in 2012
Apparent cause was substantial growth in accounts receivable and inventories.
Positive cash flow in 2013
It will be necessary to monitor cash flow operations and the management of inventories.

49. Sage Inc.: Analysis of the Statement of Cash Flows
Summary Analysis of the Statement of Cash Flows
Provides an approach to analyzing the statement of cash flows
Provides comparative cash flow data
Underlines the importance of internal cash generation from operations
Highlights the implications for investing and financing activities when cash is not generated from operations

50. Sage Inc.: Analysis of the Statement of Cash Flows

51. Sage Inc.: Analysis of the Statement of Cash Flows
Analysis of Cash Inflows
Generating cash from operations is the preferred method for obtaining cash.
Using external sources to generate the majority of cash year after year should be further investigated.

52. Sage Inc.: Analysis of the Statement of Cash Flows
Analysis of Cash Outflows – Sage Inc.
Purchases of property, plant, and equipment decreased in 2012 compared to 2011.
Capital expenditures increased in dollars from 2012 to 2011 but not in percentage due to negative cash flow from operations.
Dividends paid increased from 2011 to 2012 and decreased from 2012 to 2013, but percentages declined each year due to cash outflows.

53. Sage Inc.: Analysis of the Statement of Cash Flows
Analysis of Cash Outflows – Sage Inc.
Capital expenditures in 2011 were covered by cash from operations.
Capital expenditures in 2012 were covered by borrowing.
Capital expenditures in 2013 were covered by both cash from operations and borrowing.

54. Sage Inc.: Analysis of the Statement of Cash Flows
Analysis of Cash Outflows
When analyzing cash outflows, the analyst should consider:
the necessity of the outflow
how the outflow was financed
Generally, it is best to finance:
short-term assets with short-term debt
long-term assets with long-term debt or issuance of stock

55. Sage Inc.: Analysis of the Statement of Cash Flows
Analysis of Cash Outflows
Repayment of debt is a necessary outflow.
Notes to the financial statements are useful in assessing how much cash will be needed in upcoming years to repay outstanding debt.
Firms should only pay dividends if the company has excess cash not needed for:
expansion
property, plant, or equipment
repayment of debt

56. Qualitative Issues Relating to the Statement of Cash Flows
Recording operating expenses as capital expenditures
Management of current asset and liability accounts
Accounting for vendor financing transactions
Recording of purchases and sales of trading securities for nonfinancial companies