1. Statement of Cash Flows answers questions such as: Is the company generating sufficient positive cash flows from its ongoing operations to remain viable?Is the company generating sufficient positive cash flows from its ongoing operations to remain viable? Will the company be able to meet its financial obligations to creditors?Will the company be able to meet its financial obligations to creditors? Will the company be able to pay its customary cash dividend?Will the company be able to pay its customary cash dividend? Why is there a difference between net income and net cash flow for the year?Why is there a difference between net income and net cash flow for the year? To what extent will the company have to borrow money in order to make needed investments?To what extent will the company have to borrow money in order to make needed investments?

2. Statement of Cash Flows Reports the Cash EffectsReports the Cash Effects –of an enterprise’s operations ( through CA & CL ) –its investing transactions (LT Assets) –its financing transactions (LT Liabilities & Owners’ Equity) Should Reconcile Net Income to Net Cash Flow from operating activitiesShould Reconcile Net Income to Net Cash Flow from operating activities

3. Statement of Cash Flows: Investing Activities Cash Received From: Collection of principal from debtorsCollection of principal from debtors Sale of loans to third partiesSale of loans to third parties Sale of debt or equity securities of other entitiesSale of debt or equity securities of other entities Sale of property, plant & equipmentSale of property, plant & equipment Cash Paid For: Loans made or purchased by the entityLoans made or purchased by the entity Purchase of debt or equity securities of other entitiesPurchase of debt or equity securities of other entities Purchase of property, plant & equipmentPurchase of property, plant & equipment

4. Statement of Cash Flows: Financing Activities Cash Received From: Issuance of equity securities (stock)Issuance of equity securities (stock) Sale of bonds, mortgages, notes & other short- term or long-term borrowingsSale of bonds, mortgages, notes & other short- term or long-term borrowings Cash Paid For: Cash dividendsCash dividends Purchase of treasury stockPurchase of treasury stock Repayment of principal on amounts borrowedRepayment of principal on amounts borrowed

5. Statement of Cash Flows: Operating Activities Cash Received From: Producing & selling goodsProducing & selling goods Providing servicesProviding services InterestInterest DividendsDividends otherother Cash Paid For: InventoryInventory Salaries & wagesSalaries & wages Taxes, duties, fines, fees, penaltiesTaxes, duties, fines, fees, penalties InterestInterest Other expensesOther expenses

6. Balance Sheet: 8 Major Classifications 1) Current Assets –Cash –Short-Term Investments –Receivables –Inventories –Prepaid Expenses 2) Long-Term Investments 3) Property, Plant & Equipment 4) Intangible Assets 5) Other Assets 6) Current Liabilities 7) Long-Term Liabilities 8) Owners’ Equity –Capital Stock –Additional Paid-in Capital –Retained Earnings –Treasury Stock –Other Items of Comprehensive Income

7. Direct Method Requires a supplemental reconciliation of net income to cash flow from operating activities.Requires a supplemental reconciliation of net income to cash flow from operating activities. Net income is reconstructed on a cash basis.Net income is reconstructed on a cash basis. Used by 2.5% of companies.Used by 2.5% of companies. Indirect Method No supplemental schedule is required.No supplemental schedule is required. Net income is reconciled to cash flow from operating activities.Net income is reconciled to cash flow from operating activities. Used by 97.5% of companies.Used by 97.5% of companies. Statement of Cash Flows: Direct vs. Indirect Methods

8. Statement of Cash Flows: Indirect Method CASH FLOW FROM OPERATING ACTIVITIES: Net Income + “Non-cash” Expenses - “Non-cash” Revenues - Increases in Current Assets + Decreases in Current Assets - Decreases in Current Liabilities + Increase in Current Liabilities +/- Losses & Gains Reported on the Income Statement = Net Cash Flow from Operating Activities CASH FLOW FROM INVESTING ACTIVITIES: + Net Decrease in all other Long Term Assets - Net Increase in all other Long Term Assets = Net Cash Flow from Investing Activities CASH FLOW FROM FINANCING ACTIVITIES: + Net Decrease in all other LT Liabilities & Equities - Net Increase in all other LT Liabilities & Equities = Net Cash Flow from Financing Activities

9. Statement of Cash Flows Reports the Cash EffectsReports the Cash Effects –of an enterprise’s operations ( through CA & CL ) –its investing transactions (LT Assets) –its financing transactions (LT Liabilities & Owners’ Equity) Should Reconcile Net Income to Net Cash Flow from operating activitiesShould Reconcile Net Income to Net Cash Flow from operating activities

10. Statement of Cash Flows: Indirect Method CASH FLOW FROM OPERATING ACTIVITIES: Net Income + “Non-cash” Expenses - “Non-cash” Revenues - Increases in Current Assets + Decreases in Current Assets - Decreases in Current Liabilities + Increase in Current Liabilities +/- Losses & Gains Reported on the Income Statement = Net Cash Flow from Operating Activities CASH FLOW FROM INVESTING ACTIVITIES: + Net Decrease in all other Long Term Assets - Net Increase in all other Long Term Assets = Net Cash Flow from Investing Activities CASH FLOW FROM FINANCING ACTIVITIES: + Net Decrease in all other LT Liabilities & Equities - Net Increase in all other LT Liabilities & Equities = Net Cash Flow from Financing Activities

11. Interpretation of the Statement of Cash Flows Examine the operating activities section carefully. –Negative cash flow is usually a sign of fundamental difficulties. –Ultimately, a positive cash flow is necessary to avoid liquidating assets or borrowing money to pay for day-to- day activities.

12. Evaluate Financial Liquidity: Net Cash Provided by Operations Average Current Liabilities = Current Cash Debt Coverage Ratio

13. Evaluate Financial Flexibility: Net Cash Provided by Operations Average Total Liabilities = Cash Debt Coverage Ratio

14. Net Cash Provided by Operations Net Cash Provided by Operations - Capital Expenditures - Cash used for dividends = Free Cash Flow Evaluate Financial Flexibility: