1. Chapter 11 Statement of Cash Flows
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2. The Purpose of the Statement of Cash Flows
* Provides information about cash inflows and outflows during a period.
* Provides information about cash changes between two balance sheet dates.
* Discloses items that affect the balance sheet but don’t show up in the income statement.
* Categorizes changes as operating, investing, or financing activities.

3. The Basic Structure of the Statement

4. Additional Disclosures
In some cases, companies must also make
one or both of the following two disclosures.
Significant non-cash investing or financing activities
Cash paid for interest and taxes 4

5. Preparing the Statement of Cash Flows
Information for the statement of cash flows is collected from a variety of sources
Preparing the statement of cash flows requires an
examination of the changes in all non-cash accounts
Therefore, in order to explain a company’s change in cash, you must explain the changes in the company’s noncash accounts. And to do that, you need the following three items:
• A comparative balance sheet
• An income statement
• Additional information on changes in account balances

6. The Cash Change Equation
Balance Sheet Equation
Cash Change Equation
Assets = Liabilities + Equity
Cash + Non-Cash Assets = Liabilities + Equity
Cash = Liabilities + Equity + Non-Cash Assets
Change Change in Change in Change in
in Cash = Liabilities + Equity Non-Cash
Assets 6

7. Three Classifications of Cash Flows
Operations –
cash flows related to selling goods and services; that is, the principle business of the firm.
Investing –
cash flows related to the acquisition or sale of noncurrent assets.
Financing –
long term and short term cash flows related to liabilities and owners’ equity; dividends are a financing cash outflow.

8. Direct and Indirect Method
calculates cash flow from operations by subtracting cash disbursements to supplies, employees, and others from cash receipts from customers.
Indirect method -
calculates cash flow from operations by adjusting net income for noncash revenues and expenses.
U.S. GAAP permits
either the direct or the indirect method;
a firm that presents the direct method must
also show a reconciliation
Most firms use this method. 8

9. Reporting Cash Flows from Operating Activities— Direct Method
Operating activities include acquiring and selling products in the normal course of business. Different types of businesses will have different transactions that are included in cash flows from operating activities. 9

10. Types of Operating Inflows of Cash
Operating Cash Inflows Into Company
Sales to customers,
Collection of cash from past sales that were made on credit, and
Interest and dividends received.
Company 10

11. Types of Operating Outflows of Cash
Operating Cash Outflows from Company
Purchases of merchandise for sale or materials to manufacture products,
Payments for operating expenses,
Interest on debt, and
Payments for services and taxes.
Company 11

12. Operating Activities - Direct Method
Calculating Cash Received from Customers

13. Operating Activities - Direct Method
Calculating Cash Paid for Inventory 13

14. Cash Paid for Operating Expenses
Cash outflows for operating expenses
+ Increase in Payable or
– Decrease in Payable
Operating expenses = 14

15. Other Revenues and Expenses in the Operating Activities Section
Two items ignored in the Operating Activities Section under the Direct Method
Depreciation
Gain/Loss on Sale of Equipment

16. Summary of Adjustments – Direct Method

17. Reporting Cash Flows from Operating Activities— Indirect Method
Net Income +
Non-cash expenses
Increases in current liabilities
Decreases in current assets -
Increases in current assets
Decreases in current liabilities
Gains from investing & financing activities
Loss from investing and financing activities =
Cash flow from operating activities 17

18. Types of Investing Inflows of Cash
Investing Cash Inflows Into Company
Sale of property, plant, and equipment,
The sale of securities (stocks and bonds) of other companies, and
The receipt of loan payments.
Company

19. Types of Investing Outflows of Cash
Investing Cash Outflows from Company
Purchases of property, plant, and equipment,
Purchase of securities, and
Making loans as investments.
Company

20. Types of Financing Inflows of Cash
Financing Inflows Into Company
Selling Stock,
Issuing Bonds,
Contributions from owners, and
Borrowing from banks on a long-term basis.
Company

21. Types of Financing Outflows of Cash
Financing Cash Outflows from Company
Repayment of notes and bonds,
Cash payments to repurchase stock (treasury stock),
Payment of dividends.
Company

22. Statement of Cash Flows for the Year Ending 12/31/2012
A Statement of Cash Flows (indirect method shown) concludes by adding the Change in Cash to the Beginning Cash balance to derive the Ending Cash balance.
Hardin Supply Company
Statement of Cash Flows for the Year Ending 12/31/2012
Net Income (amounts in thousands of dollars)
$ 14
Depreciation and amortization expense 25
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Cash flow from operating activities
$ 35
Cash flow from investing activities
(92)
Cash flow from financing activities 30
Change in cash
$(27)
Cash, January 1, 2012 45
Cash, December 31, 2012
$ 18
The Company receives $100 Cash from a customer 22

23. The cash that remains is “free” to be used as the company chooses.
Free Cash Flow
The calculation starts with cash flows from operating activities, which is a measure of a company’s ability to generate cash from its current operations.
It then subtracts capital expenditures, which refers to the cash that a company spends on fixed assets during the year, and dividends, which are payments to stockholders
during the year.
The cash that remains is “free” to be used as the company chooses.

24. Cash Flow Adequacy Ratio
Cash flow adequacy ratio compares free cash flow to the average amount of debt maturing in the next five years and measures the ability to pay maturing debt.
The 6.3 ratio indicates that Under
Armour generated over $6.30 in free cash
flow for every $1 of debt maturing
in each of the next five years.

25. End of Chapter 11