1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Statement of Cash Flows Chapter 12

2. 12-2 Statement of Cash Flows Income Statement Balance Sheet Statement of Cash Flows The statement of cash flows highlights the major activities that impact cash flows and,hence, affect the overall cash balance.

3. 12-3 Purpose of the Statement of Cash Flows Are cash flows sufficient to support ongoing operations? Can we pay debts? Can we pay dividends? Why is there a difference between net income and net cash flow? Will the company have to borrow money to make needed investments?

4. 12-4 A Fundamental Principle  Cash Balance =  Noncash Balance Sheet Accounts This principle ensures that properly analyzing the changes in all noncash balance sheet accounts always quantifies the cash inflows and outflows that explain the change in the cash balance.

5. 12-5 A Review of Basic Equations Basic Equation for Asset Accounts Beginning balance + Debits – Credits = Ending balance Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts Beginning balance – Debits + Credits = Ending balance

6. 12-6 Statement of Cash Flows: Key Concepts The term cash on the statement of cash flows refers broadly to both currency and cash equivalents. Currency and Bank Accounts Cash Treasury Bills Money Market Funds Commercial Paper Cash Equivalents

7. 12-7 Organizing a Statement of Cash Flows Operating Activities Revenue and expense transactions that affect net income. Investing Activities Acquiring or disposing of noncurrent assets. Financing Activities Borrowing from and repaying principal to creditors and transactions with stockholders.

8. 12-8 Organizing a Statement of Cash Flows

9. 12-9 Operating Activities: Direct or Indirect Method? Reconstructs the income statement on a cash basis from top to bottom Direct Method Accrual net income is adjusted to a cash basis; Used by 99% Indirect Method Both methods result in the exact same amount of cash provided by operating activities.

10. 12-10 The Indirect Method: A Three-Step Process Step 1 Step 2 Step 3 Add depreciation charges to net income. Analyze net changes in noncash balance sheet accounts. Adjust for gains and losses.

11. 12-11 Summary of Key Concepts

12. 12-12 Summary of Key Concepts

13. 12-13 Free Cash Flows Free cash flow measures a company’s ability to fund its capital expenditures and dividends from its net cash provided by operating activities.

14. 12-14 Earnings Quality Managers generally perceive that earnings are of higher quality when the earnings: 1.are not unduly influenced by inflation, 2.are computed using conservative accounting principles and estimates, and 3.are correlated with net cash provided by operating activities.

15. 12-15 Computing Net Cash Provided by Operating Activities The direct method computes net cash provided by operating activities by reconstructing the income statement on a cash basis from top to bottom. Net cash provided by operating activities under the direct method will always agree with the amount computed using the indirect method.

16. 12-16 Similarities and Differences in Handling Data Adjustments for accounts that affect revenue are the same in the direct and indirect methods. Adjustments for accounts that affect expenses are handled in opposite ways for the direct and indirect methods.

17. 12-17 Similarities and Differences in Handling Data Under the direct method, no adjustments for gains and losses on the sale of assets are needed.

18. 12-18 Special Rules—Direct and Indirect Methods Requires a reconciliation between net income and the net cash provided by operating activities Direct Method Requires disclosure of amount of interest and income taxes paid during the year Indirect Method

19. 12-19 End of Chapter 12