1. Chapter 4 Statement of Cash Flows
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2. Why Cash Flow is Important: An Example
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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
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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.
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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.
It is extremely important as an analytical tool.
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6. Why Cash Flow is Important: An Example
Cash flows are segregated by:
operating activities,
investing activities, and
financing activities.
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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.
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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.
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9. Statement of Cash Flows: Basic Principle
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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.
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11. Analyzing the Statement of Cash Flows
The statement of cash flows helps the analyst determine the following:
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.
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12. 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
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13. 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.
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14. Analyzing the Statement of Cash Flows
Cash Flow from Operations
Temporary shortfalls of cash can be satisfied by borrowing or other means, but ultimately a firm must generate cash.
Periods of high interest rates and inflation contributed to the enhanced attention paid to cash flow by investors and creditors.
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15. Analyzing the Statement of Cash Flows
Nocash Corporation
Nocash Corporation had sales of $50,000 in its first year of operations.
Nocash Corporation had sales of $100,000 in its second year of operations.
Nocash Corporation had expenses of $40,000 in its first year of operations.
Nocash Corporation had expenses of $70,000 in its second year of operations.
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16. Analyzing the Statement of Cash Flows
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17. Analyzing the Statement of Cash Flows
Nocash Corporation
The income statement does not show several relevant facts.
Nocash eased its credit policies and attracted lower quality customers.
Nocash purchased a new line of inventory near the end of Year 1 and had to sell it below cost.
Rumors regarding problems with accounts receivable and inventory management prompted some suppliers to refuse the sale of goods on credit to Nocash.
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18. Analyzing the Statement of Cash Flows
Nocash Corporation
The effects of these factors can be found on the balance sheet:
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19. Analyzing the Statement of Cash Flows
Nocash Corporation
If Nocash’s net income is recalculated on a cash basis, the following adjustments would be made:
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20. 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
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21. 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, and
fluctuations in cash flow from operations.
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22. Sage Inc.: Analysis of the Statement of Cash Flows
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23. Sage Inc.: Analysis of the Statement of Cash Flows
Cash Flow from Operating Activities – Sage Inc.
Negative cash flow from operations in 2015
Positive net income in 2015
Apparent cause was substantial growth in accounts receivable and inventories.
Positive cash flow in 2016
It will be necessary to monitor cash flow operations and the management of inventories.
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24. 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
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25. Sage Inc.: Analysis of the Statement of Cash Flows
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26. Sage Inc.: Analysis of the Statement of Cash Flows
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27. Sage Inc.: Analysis of the Statement of Cash Flows
Analysis of Cash Inflows – Sage Inc.
Operations supplied 62% of needed cash in 2016 and 73% in 2014.
The firm had to borrow heavily in 2015, with debt accounting for 98% of cash inflows.
Sage Inc. also borrowed in 2016 and to obtain needed cash not supplied by operations.
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28. 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.
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29. Sage Inc.: Analysis of the Statement of Cash Flows
Analysis of Cash Outflows – Sage Inc.
Purchases of property, plant, and equipment decreased in 2015 compared to 2014.
Capital expenditures increased in dollars from 2015 to 2014 but not in percentage due to negative cash flow from operations.
Dividends paid increased from 2014 to and decreased from 2015 to 2016, but percentages declined each year due to cash outflows.
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30. Sage Inc.: Analysis of the Statement of Cash Flows
Analysis of Cash Outflows – Sage Inc.
Capital expenditures in 2014 were covered by cash from operations.
Capital expenditures in 2015 were covered by borrowing.
Capital expenditures in 2016 were covered by both cash from operations and borrowing.
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31. 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 and
how the outflow was financed.
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32. Sage Inc.: Analysis of the Statement of Cash Flows
Analysis of Cash Outflows
Generally, it is best to finance
short-term assets with short-term debt and
long-term assets with long-term debt or issuance of stock.
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33. 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.
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34. Sage Inc.: Analysis of the Statement of Cash Flows
Firms should only pay dividends if the company has excess cash not needed for
expansion,
property, plant, or equipment, or
repayment of debt.
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35. 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
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36. Practice Question
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37. Assignment Deadline 03/11/2018 (Friday) till 11:00 PM
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