1. Measuring and Reporting Cash Flows Completing the package

2. 2007/01/31International Business Program Financial Accounting 1 Background of cash flow reporting Only significant item not originating with Br. Paciolo Emerged in USA about 1990 Became part of IAS shortly afterwards Huge resistance in continental Europe. Why? Did not become wide-spread until 2005

3. 2007/01/31International Business Program Financial Accounting 2 Reasons for cash flow statement Traditional statements do not consider liquidity Liquidity increasingly crucial issue in analyzing company –Profitable companies go bankrupt –Significant scandals Reconcile profit and cash flow

4. 2007/01/31International Business Program Financial Accounting 3 Cash flow and profits Cash cycle and role of profit, depreciation, and amortization See textbook

5. 2007/01/31International Business Program Financial Accounting 4 Basis of cash flow statement Cash and cash equivalents, not pure cash Why?

6. 2007/01/31International Business Program Financial Accounting 5 Three major parts of Cash Flow Statement Operations Investing Financing What is included in each? Why is distinction important?

7. 2007/01/31International Business Program Financial Accounting 6 Three major parts of Cash Flow Statement (continued) Operations – all items affecting day to day normal operations of a business The most important section of the cash flow statement by far!!!!!!!!!!!!! Why?

8. 2007/01/31International Business Program Financial Accounting 7 Three major parts of Cash Flow Statement (continued) Operations Most important section of statement!! Why? –Company must generate enough cash from operations to survive –Must generate cash from operations to replace operating assets –In some cases must generate cash form operations to repay debt

9. 2007/01/31International Business Program Financial Accounting 8 Three major parts of Cash Flow Statement (continued) Operations (continued) Two formats –Indirect – reconcile income and cash flow –Direct – components listed separately –Indirect is most common and preferred –Why?

10. 2007/01/31International Business Program Financial Accounting 9 Three major parts of Cash Flow Statement (continued) Operations (continued) Two formats –Indirect – reconcile income and cash flow –Direct – components listed separately –Indirect is most common and preferred –Why? Reconciliation reveals important information

11. 2007/01/31International Business Program Financial Accounting 10 Three major parts of Cash Flow Statement (continued) Investing (includes PP&E) Why separate category?

12. 2007/01/31International Business Program Financial Accounting 11 Three major parts of Cash Flow Statement (continued) Investing (included PP&E) Why separate category? –Company must renew capital assets to survive. Gives information to analyze company’s asset replacement policy –Routine replacements, expansions, contractions –How routine replacements financed

13. 2007/01/31International Business Program Financial Accounting 12 Three major parts of Cash Flow Statement (continued) Financing –Sources of capital for growth –Other financial management activities not apparent on other statements. –Debt vs. equity issues –Risks