1. BSAD 221 Introductory Financial Accounting Donna Gunn, CA

2. Cash Flow Statement This statement is a categorized list of all transactions of the period that affected the Cash account. The three categories are...  Operating activities,  Investing activities, and  Financing activities.

3. Classifications of the Cash Flow Statement Cash Equivalents Cash Currency Short-term, highly liquid investments. Readily convertible into cash. Short-term, highly liquid investments. Readily convertible into cash.

4. Statement of Cash Flows To assess the firm’s ability to generate cash and cash equivalents and To assess the firm’s cash requirements Statement of Cash Flows shows: Where the cash came from What the cash was used for The change in the cash balance

5. Usefulness of the Statement of Cash Flows Cash is a “company’s lifeblood” Provides creditors with useful information about a company, such as: Ability to generate net cash from operating activities Cash flow trends / patterns from operating activities Major reasons for positive or negative net cash from operating activities Whether the cash flows are renewable or sustainable

6. Statement of Cash Flows Cash activities are divided into three main categories: 1.Operating Activities Main revenue-producing activities 2.Investing Activities Changes in long-term assets and investments 3.Financing Activities Changes in equity and non-operating liabilities

7. Focus on Cash Flows Operating Activities -Cash received from customers -Cash received from investments Investing Activities -Purchasing long-term assets and investments for cash - Selling long-term assets and investments for cash -Lending cash to others -Receiving principal payments on loans made to others Financing Activities -Borrowing cash from banks -Repaying the principal on borrowings from banks -Issuing stock for cash -Repurchasing stock with cash -Paying cash dividends

8. Cash Flows from Operating Activities Direct Method The Direct Method of presenting the Operating Activities section of the cash flow statement reports components of cash flows from operating activities as gross receipts and gross payments. Indirect Method The Indirect Method of presenting the Operating Activities section of the cash flow statement adjusts net income to compute cash flows from operating activities.

9. Cash Flows from Operating Activities – Direct Method + _ Outflows to: Purchase goods (for resale) and services Salaries and wages Income taxes Interest on liabilities Outflows to: Purchase goods (for resale) and services Salaries and wages Income taxes Interest on liabilities Inflows from: Sales to customers Interest and dividends received Inflows from: Sales to customers Interest and dividends received Cash Flows from Operating Activities

10. Cash Flows from Operating Activities— Direct Method

11. Net Income Cash Flows from Operating Activities - Indirect Method +/- Changes in current assets and current liabilities. + Losses and - Gains + Noncash expenses such as depreciation and amortization. The indirect method adjusts net income by eliminating non-cash items. Cash Flows from Operating Activities- Indirect Method

12. Cash Flows from Operating Activities Operating activities are related to the transactions that make up net income. The operating section of the statement of cash flows begins with net income, taken from the income statement and is followed by adjustments to reconcile net income to net cash.

13. Cash Flows from Operating Activities Net Income +/- Adjustments Depreciation Expense Gains and Losses on the Sale of Long-Term Assets Changes in the Current Asset and Current Liability Accounts A C B

14. Make adjustments for changes in current assets and current liabilities using the decision table above.

17. The Statement of Cash Flows will begin with Net income from the Statement of Earnings. Operating Activities - Indirect Method

18. The Net income number will be adjusted for non-cash items. In the case of Andrew Peller, those adjustments included amortization expense ($1,908) This is the most common non-cash item and one you will ALWAYS need to adjust In the case of Andrew Peller, those adjustments included amortization expense ($1,908) This is the most common non-cash item and one you will ALWAYS need to adjust Operating Activities - Indirect Method

19. With the indirect method, always start with the net income or net loss for the period. Next, adjust for the non-cash items included in net income. With the indirect method, always start with the net income or net loss for the period. Next, adjust for the non-cash items included in net income.

20. To complete the Cash flows from operating activities section, you must examine a comparative balance sheet to determine the changes in current assets and current liabilities from the beginning of the period to the end of the period.

21. Now, make adjustments for changes in current assets and current liabilities Net Income 2,556 Add back amortization 1,908 Change in non-cash working capital: Increase in accounts receivable (6,005) Increase in inventory (1,739) Increase in prepaid expenses (1,172) Increase in accounts payable 6,213 Increase in accrued liabilities 565 Decrease in income taxes payable (470) Net cash provided by (used in) operating activities $1,856

22. Direct Method vs. Indirect Method The CICA Handbook recommends the direct method, but it is rarely seen in practice. Many financial executives have reported that they do not use it because it is more expensive to implement than the indirect method.

23. Cash Flows from Investing Activities + _ Inflows from: Sale or disposal of property, plant, and equipment. Sale or maturity of investments in securities. Inflows from: Sale or disposal of property, plant, and equipment. Sale or maturity of investments in securities. Outflows to: Purchase property, plant, and equipment. Purchase investments in securities. Outflows to: Purchase property, plant, and equipment. Purchase investments in securities.

24. Cash Flows from Financing Activities + _ Outflows to: Repay principal to creditors (excluding interest) Repurchase equity securities from owners Pay dividends to shareholders Outflows to: Repay principal to creditors (excluding interest) Repurchase equity securities from owners Pay dividends to shareholders Inflows from: Borrowing on notes, mortgages, bonds, etc. from creditors Issuing equity securities to shareholders Inflows from: Borrowing on notes, mortgages, bonds, etc. from creditors Issuing equity securities to shareholders

25. Relationship to the Balance Sheet and Income Statement Information needed to prepare a cash flow statement: Comparative Balance Sheets Comparative Balance Sheets Income Statement Income Statement Additional details concerning different types of transactions and events Additional details concerning different types of transactions and events

26. Relationship to the Balance Sheet and Income Statement  Cash =  Liabilities   Shareholders’ Equity   Non-cash Assets Derives from... Assets = Liabilities Shareholders’ Equity

27. Additional Cash Flow Disclosures Required Supplemental Information 1. Reconciliation of net income to cash flow from operations. 2. Cash paid for income taxes and interest. 3. Significant non-cash investing and financing activities. Required Supplemental Information 1. Reconciliation of net income to cash flow from operations. 2. Cash paid for income taxes and interest. 3. Significant non-cash investing and financing activities.

28. Adjustment for Gains and Losses Gains Gains must be subtracted from net income to avoid double counting the gain. Losses Losses must be added to net income to avoid double counting the loss. Transactions that cause gains and losses should be classified on the cash flow statement depending on their dominate characteristics. For example, if the sale of equipment produced a gain, it would be classified as an investing activity.

29. Interpreting Cash Flows from Operating Activities Accounts Receivable Changes Managers sometimes attempt to boost declining sales by extending credit terms or by lowering credit standards. The resulting increase in accounts receivable can cause net income to outpace cash flows from operations. Inventory Changes Inventory growth can be a sign that planned sales growth did not materialize. A decline in inventory can be a sign that the company is anticipating lower sales in the next quarter.

30. Interpreting Cash Flows from Financing Activities The long-term growth of a company is normally financed from three sources: 1.internally generated funds, 2.the issuance of shares, and 3.money borrowed on a long-term basis. The statement of cash flows shows how management has elected to fund its growth. This information is used by analysts who wish to evaluate the capital structure and growth potential of a business.