1. (2) Statement of Cash Flows

2. The Function of the CF Statement
The Statement of cash flows shows:
Where did the company obtain its cash
2. How did the company spend its cash
3. Why the cash balance changed from the beginning to the end of the accounting period.

3. Cash and Cash Equivalents
Statement of Cash Flows includes:
Cash
Cash equivalents
Money market accounts
Commercial paper
Treasury bills
Excerpt from IBM 2008 Annual Report

4. Statement of Cash Flows
Operating
Activities
Investing
Activities
Financing
Activities
CASH INFLOWS

5. Statement of Cash Flows
Cash Inflows
CASH OUTFLOWS
Operating
Activities
Investing
Activities
Financing
Activities

6. Classification of Cash Flows
The statement of cash flows classifies cash receipts and cash payments into three major categories
Operating Activities
Investing Activities
Financing Activities

7. The Format of CF Statement

8. Operating Activities (CF from ongoing operations)
Involve the cash inflows and outflows from activities that enter into the determination of net income
Cash Inflows
Receipts from sale of goods and services
Receipts from sale of trading securities
Interest and dividends
Cash Outflows
Payments for wages, inventory, expenses, interest, and taxes
Payments for purchase of trading securities

9. Investing Activities (CF from buying/selling generally non-current assets)
Involve the acquisition and sale of property, plant, and equipment and other long-term assets, including long-term investments; and the making and collecting of loans
Cash Inflows
Receipts from selling plant assets
Receipts from selling marketable securities and long-term investments
Collections on loans
Cash Outflows
Expenditures on purchases of plant assets
Expenditures on purchases of securities and long-term investments
Cash lent to borrowers

10. Financing Activities (CF from Dealing with the providers of capital)
Obtaining resources from stockholders and providing them with a return on their investments, and obtaining resources from creditors and repaying the amounts borrowed (settling the obligations)
Cash Inflows
Proceeds from stock issues and from short- and long-term borrowing
Sales of treasury stock
Cash Outflows
Repayments of loans (excluding interest)
Payments to owners, including cash dividends
Purchases of treasury stock

11. Classification of Cash Inflows and Cash Outflows
ACTIVITIES
CASH OUTFLOWS
OPERATING
From sales of goods and
services to customers
From receipt of interest or
dividends on loans or
investments
From sale of trading securities
From sale of property, plant,
and equipment and other
long-term investments
From sale of long-or short-term
held-to-maturity and available-
for-sale securities
From collection of loans
From sale of preferred or
common stock
From issuance of debt
FINANCING
INVESTING
To pay wages
To purchase inventory
To pay expenses
To pay interest
To pay taxes
To purchase trading securities
To purchase property, plant,
and equipment and other long-
term assets
To purchase long- or short-term
To make loans
To acquire preferred or
To repay debt
To pay dividends

12. Noncash Investing and Financing Transactions
Significant transactions that involve only long-term assets, long-term liabilities, or stockholders’ equity
Not reflected on the statement of cash flows; no cash inflows or outflows
Noncash examples:
Exchange of long-term asset for a long-term liability
Settle a debt by issuing capital stock
Take out a long-term mortgage to purchase real estate
Future cash flows are affected, so disclose these transactions in a separate schedule or at the bottom of the statement

13. Components of CF Statement1
Indirect method begins with net
income and ends with cash flows
from operating activities
Operating Activities section 2
Cash transactions involving
capital expenditures and loans
Investing Activities section 3
Financing Activities section
Debt, stock, dividend, and treasury stock transactions 4
Reconciliation of beginning and ending balances of cash
Ties to cash balances of the
balance sheets

14. Determining Cash Flows from Operating Activities
The direct method
Adjusts each item on the income statement to its cash equivalent
More easily understood by the average reader
The indirect method
Lists only necessary adjustments to convert net income to net cash flows
Superior from an analyst’s perspective
Used by most companies
Both methods produce the same net figure

15. Indirect Method Adjustments to Net Income
Cash Income
Cash
Expenses
Cash
Revenue
Collections
Net Income +
Revenues
Expenses _ =
Net Income
Revenues
Expenses
Payments _
Accrued
Revenue
Accrued
Expenses
Accrued
Income