1. The Statement of Cash Flows
Chapter 6
The Statement of Cash Flows

2. The Purpose of the Statement of Cash Flows

3. The Statement of Cash Flows
Summarizes cash flows for a period of time
“For the year ended...”
Explains how cash was generated and used
Reflects transactions already reported in the
balance sheet
income statement
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4. The Statement of Cash Flows
Particularly useful when net income does not accurately reflect the economic performance of a business:
Noncash expenses are high
Growth companies use more cash than expenses imply
Accrual basis accounting assumptions are stretched to the limit
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5. The Statement of Cash Flows
A one-page summary of the results of a company’s operating, investing, and financing activities
A pro forma SCF
As a forecasting tool
Whether future cash activities are consistent and workable
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6. Information Reported on Statement of Cash Flows

7. Cash Equivalents
The SCF explains the changes in cash and cash equivalents during a period
short-term, highly liquid investments
i.e., treasury bills, commercial paper, and money market funds
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8. Three Categories of Cash Flows
Cash receipts and disbursements are classified into three main categories:
Operating activities
Investing activities
Financing activities
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9. Operating Activities
Includes all transactions relating to a company delivering or producing its goods for sale and providing its services
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10. Major Cash Flows: Operating Activities
Cash receipts from:
Sale of goods or services
Sale of trading securities
Interest revenue
Dividend revenue
Cash payments for:
Inventory purchases
Wages and salaries
Taxes
Interest expense
Other expenses (e.g., utilities, rent)
Purchase of trading securities
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11. Investing Activities
Includes cash inflows and outflows from changes in noncurrent assets:
Productive assets
Investment securities
Loans to others
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12. Major Cash Flows: Investing Activities
Cash receipts from:
Sale of plant assets
Sale of a business segment
Sale of nontrading securities
Collection of principal on loans
Cash payments for:
Purchase plant assets
Purchase of nontrading securities
Making loans to other entities
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13. Financing Activities Includes obtaining resources from
owners and providing them a return on their investment
creditors and repaying those borrowings
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14. Major Cash Flows: Financing Activities
Cash receipts from:
Issuance of stock
Borrowing (e.g., bonds, notes, mortgages)
Cash payments for:
Cash dividends
Repayment of loans
Repurchase of stock (treasury stock)
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15. Relationship of the SCF to the Balance Sheet and Income Statement
Stmt of Cash Flows
Operating
Current Assets
Accrual Adjustments
Investing
Long-term Assets
Financing
Net Change in Cash
Current Liabilities
Accts Pay & Accrued Liabil
Income Statement
Short-term Loans Pay
Current Portion Long-term
Revenues
Expenses
Long-term Liabilities
Stockholders’ Equity
Net Income
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16.  Cash Flow Pattern or Cash from... Cash flow is typically
Inflow (positive)
Outflow (negative)
Operations 
Investing
Financing or
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17. Cash Flow Pattern
A company’s cash flow pattern is a general reflection of where the company is in its life cycle ...
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18. Start-Up, High Growth Company
Cash Flow Pattern
Start-Up, High Growth Company
Investing
Financing
Operating
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19. Cash Flow Pattern Investing Financing Operating Steady-State Company
Dividends
Financing
Operating
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20. Cash Flow Pattern Investing Financing Operating Cash Cow
Dividends
Share Repurchases
Loan Repayment
Financing
Operating
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21. Noncash Investing and Financing Activities
Activities that affect a company’s financial position but do not result in cash flows
Example: Land acquired by issuing stock
These activities should be disclosed separately in a schedule or in the notes to the financial statements
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22. Preparing a SCF A Simple Example

23. Analysis of Transactions
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24. Statement of Cash Flows
Same as 12/31/05 balance sheet

25. Analysis of Other Primary Financial Statement for SCF

26. Alternative Approach Statement of Cash Flows
Determine cash inflows and outflows through analysis of changes in
Individual income statement accounts
Individual balance sheet accounts
Financial Accounting, 7e Stice/Stice, 2006 © Thomson

27. A Six-step Process For Preparing The SCF
Compute cash balance change for the year
Convert income statement from accrual to cash basis
Eliminate non-cash expenses
Eliminate gains and losses from investing and financing activities
Adjust revenues and expenses for changes in current assets and current liabilities
Analyze long-term assets to determine investing activities
Analyze long-term debt and stockholders’ equity to determine financing activities
Reconcile total of steps 2, 3, & 4 with step 1; prepare statement
Disclosure other significant non-cash financing and investing activities

28. Step #1 Silmaril Inc.
Compute the change in the cash balance during the period.
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29. Step #2 Silmaril Inc.
Convert the income statement from accrual basis to cash basis.
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30. Step #2 Silmaril Inc. 2a) Eliminate noncash expenses
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31. Step #2 Silmaril Inc.
2b) Eliminate the effects of non-operating activities
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32. Step #2 Silmaril Inc.
2c) Adjust remaining current assets and liabilities from accrual to cash
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33. Step #2 Silmaril Inc. Completed worksheet
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34. Reporting Cash Flows From Operations
Two methods
Indirect Method
Used by most companies because it is easy to construct from the balance sheet and income statement
Direct Method
Preferred by the FASB and many users because it is easy to understand
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35. Indirect Method
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36. Some Rules of Thumb for the Indirect Method
DIRECTION OF CHANGE
Increase
Decrease
NECESSARY ADJUSTMENT
Subtract the increase
Add the decrease
Add the increase
Subtract the decrease
ACCOUNT
Current asset
Current liability
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37. Silmaril Inc. Cash Flows from Operations: Indirect Method
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38. Statement of Cash Flows Direct Method
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39. Silmaril Inc. Cash Flows from Operations: Direct Method
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40. Silmaril Inc. Cash from Operations
Direct Method
Indirect Method
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41. Step #3 Silmaril Inc.
Analyze long-term assets to identify financing transactions
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42. Step #4 Silmaril Inc.
Analyze long-term liabilities and stockholders’ equity to identify financing transactions
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43. Silmaril Inc. Step 5 SCF Indirect Method

44. Using Cash Flow Information to Forecast

45. Using Cash Flow Information To Forecast Financial Position
The same six-step process can be used to construct a forecasted statement of cash flows
Use a projected balance sheet and income statement
The cash flow projection allows a company to plan the timing of new loans, stock issuances, asset acquisitions, etc.
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46. Using Cash Flow Information To Forecast Financial Position
Projected cash flow statements allow
Potential lenders to evaluate the debt repaying ability of debtors
Potential investors to evaluate the likelihood of receiving cash dividends in the future
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47. In Summary ... SCF provides information on cash sources and uses
SCF describes three types of cash activities
Cash flow patterns reflect the life cycle stage of the business
SCF can follow either the indirect or direct format
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