1. Chapter 4: Statement of Cash Flows
“Joan and Joe: A Tale of Woe”
Joe added up profits and went to see Joan,
Assured of obtaining a much-needed loan.
When Joe arrived, he announced with good cheer:
“My firm has had an outstanding year,
And now I need a loan from your bank.”
Eyeing the statements, Joan’s heart sank.
“Your profits are fine,” Joan said to Joe.
“But where, oh where, is your company’s cash flow?
I’m sorry to say: the answer is ‘no’.”
--L. Fraser

2. Statement of Cash Flows
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.

3. Statement of Cash Flows
Provides information about cash inflows and outflows during an accounting period
Extremely important as an analytical tool
Only source in financial statement data for learning about the generation of cash from operations

5. Preparing a Statement of Cash Flows
Begins with a return to the balance sheet
Requires a 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

6. 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
categorizing the flows by operating, financing, or investing activities
The inflows less the outflows balance to and explain the change in cash.

7. Four Parts of a Statement of Cash Flows
Operating activities
Investing activities
Financing activities

8. Four Parts of a Statement of Cash Flows
Cash and highly liquid short-term marketable securities
Also called cash equivalents
If a company separates marketable securities into two accounts (cash and cash equivalents and short-term investments), the short-term investments are classified as investing activities.

9. Four Parts of a Statement of Cash Flows
Operating activities
Delivering or producing goods for sale and providing services
Cash effects of transactions and other events

10. Class Exercise
Use Coors Annual report to review this section.

11. Four Parts of a Statement of Cash Flows
Investing activities
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 of time
Lending money and collecting on loans

12. Class Exercise
Use Coors Annual report to review this section.

13. Four Parts of a Statement of Cash Flows
Financing activities
Borrowing from creditors and repaying the principal
Obtaining resources from owners and providing them with a return on the investment

14. Class Exercise
Use Coors Annual report to review this section.

15. Analyzing the Statement of Cash Flows
The statement of cash flows is an important analytical tool for creditors, investors, and other users of financial statement data.

16. Analyzing the Statement of Cash Flows
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
effectiveness in implementing financing and investing strategies

17. 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
How? The problem is cash.

18. Cash Flow from Operations
Ongoing operation depends upon its 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.

19. Analysis of the Statement of Cash Flows – Analyst Concerns
Success or failure of the firm in generating cash from operations
Underlying causes of the positive or negative operating cash flow
Magnitude of positive or negative operating cash flow
Fluctuations in cash flow from operations over time