Chapter 13
The Statement of Cash Flows
Objectives

State the Cash Flow’s primary purpose, its
usefulness

Discuss & understand operating, investing, and
financing activities, and noncash.

Analyze a company’s cash flow statement.

Prepare one using: the indirect method


Note: you are not responsible to know the worksheet or direct
method. (appendix 13A and 13B)
NOTE: SUPPLEMENTARY MATERIAL – Product Life Cycle
and Cash Flow.
Warning: Not in book!!!
The Primary Purpose of the
Statement of Cash Flows Is...

To provide information about:
• cash receipts,
• cash payments, and
• the net change in cash resulting from:
 operating,
 investing, and
 financing activities of a company
during a period.
Categories of Cash Flows
Cash Flows are subdivided into three categories:
Operating – Cash Receipts and Cash Disbursements
from day to day transactions. These transactions are
generally from the Income Statement and affect Current
Assets and Current Liabilities

Investing – Cash Receipts and Cash Disbursements
from the purchase and sale of Long-Term Assets

Financing – Cash Receipts and Cash Disbursements
from Long-term Debt and Equity
Questions the Statement of Cash
Flow Answers
Operating Activities...
Include:
 The cash effects of transactions that create
revenues and expenses and
 Enter into determination of net income.
Involve Income Statement Items
Investing Activities...
Include:
 Purchasing and disposing of
investments and productive long-lived
assets using cash and
 Lending money and collecting the loans.
Involve Investments and LongTerm Asset Items
Financing Activities...
Include:
 Obtaining cash from issuing debt and
repaying the amounts borrowed and
 Obtaining cash from stockholders and
paying them dividends.
Involve Long-Term Liability and
Stockholders’ Equity Items
Types of Cash Flows Operating Activities

Cash inflows:
• From sale of goods or services
• From interest received and dividends
received
• To receive cash on account
 Cash outflows:
• To suppliers for inventory
• To pay down accounts payable
• To employees for services
• To government for taxes
• To lenders for interest
• To others for expenses
Types of Cash Flows Investing Activities


Cash inflows:
• From sale of property, plant, and equipment
• From sale of debt or equity securities of other entities
• From collection of principal on loans to other entities
Cash outflows:
• To purchase property, plant, and equipment
• To purchase debt or equity securities of other entities
• To make loans to other entities
Types of Cash Flows Financing Activities

Cash inflows:
• From issuance of equity securities (company's
own stock)
• From issuance of debt (bonds and notes)
 Cash outflows:
• To stockholders as dividends
• To redeem long-term debt or reacquire capital
stock (treasury stock).
Operating Activities - ALERT

Some cash flows relating to investing or
financing activities are classified as operating
activities. For example...
• Receipts of investment revenue (interest
and dividends) and
• Payments of interest to lenders
• Sale or Purchase of Trading Securities
Significant
Noncash Activities...


That do not affect cash are NOT reported in the
body of the statement of cash flows.
Are reported:
• Separately--bottom of CF statement or
• Separately--note to the financial
statements.
Significant
Noncash Activities...
1. Issuance of common stock to purchase
assets.
2. Conversion of bonds into common stock.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.
For IFRS, non
cash items must
be reported in
notes.
Classification of Cash Flows
Accrual Basis versus Cash Basis of
Accounting
Accrual Basis – Recognizes Revenues at
the time the earnings process is complete,
and expenses at the time they are
incurred, regardless of cash flow.
Cash Basis– Recognizes Revenues when
the Cash is Received, and Expenses at
the time the Cash is Paid.
Financial Statements are prepared using
the Accrual Basis of Accounting
The Statement of Cash Flows – Requires
that the Accrual Basis be converted to the
Cash Basis of Accounting.
This Can be Done either:

Directly – by examining each item on the Income
Statement, or

Indirectly – By Adjusting Net Income for the changes
in the Non-Cash Balance Sheet Accounts.
Why Report the Causes of Changes in
Cash?
Because investors, creditors, and
other interested parties want to know
what is happening to a company’s
most liquid asset,
CASH
Statement of Cash Flows Helps
Users Evaluate
1. Future cash flows?
2. Pay Dividends and meet obligations?
3. Reasons for differences between net income
and net cash provided (used) by operating
activities
4. What happened in investing and financing?
Usefulness and Format
Format of the Statement of Cash Flows
Order of Presentation:
1.
Operating activities.
2.
Investing activities.
3.
Financing activities.
The cash flows from operating activities section always
appears first, followed by the investing and financing
sections.
Example: Cash Flow Stmt
Joe's Manufacturing COMPANY
CASH FLOW STATEMENT
DEC. 31, 2001
CASH FLOW FROM OPERATING ACTIVITIES
NET INCOME
$
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH:
(Increase)/Decrease in Accounts Receivable
(30,000)
Increase/(Decrease) in Accounts Payable
4,000
NET CASH PROVIDED BY OPERATING ACTIVITIES
(26,000)
9,000
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of Equipment
NET CASH USED BY INVESTING ACTIVITIES
(10,000)
(10,000)
CASH FLOW FROM FINANCING ACTIVITIES
Issuance of Common Stock
Payment of cash Dividends
NET CASH USED BY FINANCING ACTIVITIES
50,000
(15,000)
35,000
35,000
NET INCREASE IN CASH
34,000
CASH AT THE BEGINNING OF THE PERIOD
-
CASH AT THE END OF THE PERIOD
$
34,000
NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of Bonds Payable to purchase land.
$
130,000
Format of the Statement of Cash Flows
During its first week, Duffy & Stevenson Company
had these transactions.
1.
Issued 100,000 shares of $5 par value common
stock for $800,000 cash.
2.
Borrowed $200,000 from Castle Bank, signing a
5-year note bearing 8% interest.
3.
Purchased two semi-trailer trucks for $170,000
cash.
4.
Paid employees $12,000 for salaries and wages.
5.
Collected $20,000 cash for services provided.
Classification
SO 2 Distinguish among operating, investing, and financing activities.
Format of the Statement of Cash Flows
During its first week, Duffy & Stevenson Company
had these transactions.
Classification
1.
Issued 100,000 shares of $5 par value common
stock for $800,000 cash.
2.
Borrowed $200,000 from Castle Bank, signing a
5-year note bearing 8% interest.
Financing
3.
Purchased two semi-trailer trucks for $170,000
cash.
Investing
4.
Paid employees $12,000 for salaries and wages.
Operating
5.
Collected $20,000 cash for services provided.
Operating
Financing
SO 2 Distinguish among operating, investing, and financing activities.
Sources of Information for the
Statement of Cash Flows



Comparative balance sheet
Current income statement
Additional information
Small EXAMPLE….
Statement Of Cash Flows Indirect Method
The transactions of Joe’s Repair Company for the
year ended 2000 are used to illustrate the
preparation of a statement of cash flows .
 Joe’s Repair Company started in January 1, 2000,
when it issued 50,000 shares of $1 par value
common stock for $50,000 cash.
 The company rented its office space and furniture
and performed consulting services throughout the
first year.

Steps in Preparing
Statement of Cash Flows
STEP #1
Determine the NET CHANGE in CASH
Increase?
Decrease?
$34,000 - 0 = $34,000 INCREASE
JOE’S Repair COMPANY
Comparative Balance Sheet
December 31, 2000
Assets
Cash
Accounts
receivable
Equipment
Total
Liabilities and
stockholders’
equity
Accounts payable
Common stock
Retained
earnings
Total
Dec. 31, 2000
Change
Increase/Decrease
$34,000
30,000
Jan. 1,
2000
$0
0
10,000
$74,000
0
$0
10,000 increase
$4,000
50,000
20,000
$0
0
0
$4,000 increase
50,000 increase
20,000 increase
$74,000
$0
$34,000 increase
30,000 increase
Income Statement and
Additional Information
COMPUTER SERVICES COMPANY
Income Statement
For the Year Ended December 31, 2000
Revenues
Operating expenses
Income before income taxes
Income tax expense
Net income
$85,000
40,000
45,000
10,000
$35,000
Additional Information:
(a) Examination of selected data indicates that a
dividend of $15,000 was declared and paid during
the year.
(b) The equipment was purchased at the end of 2000.
No depreciation was taken in 2000.
Steps in Preparing
Statement of Cash Flows
STEP #2
Determine the NET CHANGE PROVIDED by
Operating Activities
You must analyze the Income Statement and
some of the Balance Sheet net changes (current
assets and liabilities) to convert Net Income
(accrual) to a cash basis. (You might need
additional information also).
Determine Net Cash Provided/Used
Operating Activities
By

Adjust net income for items that did not affect
cash.

Net income must be converted because earned
revenues may include credit sales that have
not been collected in cash and expenses
incurred that may not have been paid in
cash.
Determine Net Cash Provided/Used
By Operating Activities
Receivables, payables, prepayments,
and inventories must be analyzed for
their effects on cash.
Determine Net Cash Provided/Used
By Operating Activities
Joe’s Repair Company (JRC) had revenues of
$85,000 in its first year of operations.
 However, JRP collected only $55,000 in cash.
Accrual basis revenue was $85,000, cash basis
revenue would be $55,000.
 The increase in accounts receivable of $30,000
must be deducted from net income.
 (If accounts receivable decrease, the decrease
must be added to net income).

Determine Net Cash Provided/Used
Operating Activities (con’t)




By
Accounts payable - When accounts payable increase
during a year, operating expenses are higher (accrual)
than they are on a cash basis.
For JRP, operating expenses reported in the income
statement were $40,000.
Since Accounts Payable increased $4,000, $36,000
($40,000 – $4,000) of the expenses were paid in cash.
So. . . . an increase in accounts payable must be added
to net income, (a decrease subtracted).
JOE’S REPAIR COMPANY
Statement of Cash Flows--Indirect Method (Partial)
For the Year Ended December 31, 2000
Cash flows from operating activities
Net income
$35,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Increase in accounts receivable
$(30,000)
Increase in accounts payable
4,000 (26,000)
Net cash provided by operating activities
$ 9,000
Steps in Preparing
Statement of Cash Flows
STEP #3
Determine the NET CHANGE PROVIDED by
Investing and Financing Activities
You must analyze the some of the Balance
Sheet net changes (long term assets and long
term liabilities and equity) to see their effects
on cash.
Determine Net Cash Provided/Used
Investing and Financing Activities

By
No data are given for the increases in Equipment of
$10,000 and Common Stock of $50,000. Assume any
differences involve cash.
 The increase in equipment is from a purchase of
equipment for $10,000 cash. This purchase is
reported as a cash outflow in the investing activities
section.
 The increase of common stock results from the
issuance of common stock for $50,000 cash. It is
reported as an inflow of cash in the financing
activities section of the statement of cash flows.
Determine Net Cash Provided/Used
Investing and Financing Activities

Reasons for the increase of $20,000 in the Retained
Earnings.
 Net income increased retained earnings by
$35,000. REPORTED IN THE OPERATING
ACTIVITIES SECTION.
 The additional information indicates that a
cash dividend of $15,000 was declared and
paid. REPORTED IN THE FINANCING
ACTIVITIES SECTION.
By
Joe’s Repair COMPANY
Statement of Cash Flows--Indirect Method (Partial)
For the Year Ended December 31, 2000
Cash flows from operating activities
Net income
Adjustments to reconcile net income to
net cash provided by operating activities:
Increase in accounts receivable $(30,000)
Increase in accounts payable
4,000
Net cash provided by operating activities
Cash flows from investing activities
Purchase of equipment
Cash flows from financing activities
Issuance of Common Stock
$50,000
Payment of cash dividends
(15,000)
Net cash provided by financing activities
$35,000
(26,000)
$ 9,000
(10,000)
35,000
BIGGER EXAMPLE….
COMPUTER SERVICES COMPANY
Comparative Balance Sheet
December 31
Assets
Cash
Accounts receivable
Inventory
Prepaid Expenses
Land
Building
Accumulated
depreciation-building
Equipment
Accumulated
depreciation-equipment
Total
2011
$55,000
20,000
15,000
5,000
130,000
160,000
2010
$33,000
30,000
10,000
1,000
20,000
40,000
Change
Increase/Decrease
$22,000 increase
10,000 decrease
5,000 increase
4,000 increase
110,000 increase
120,000 increase
(11,000)
27,000
(5,000)
10,000
6,000 increase
17,000 increase
(3,000)
$398,000
(1,000)
$138,000
2,000 increase
COMPUTER SERVICES COMPANY
Comparative Balance Sheet
December 31
Liabilities and
Stockholders’ equity
Accounts payable
Income tax payable
Bonds payable
Common stock
Retained earnings
Total
2011
2010
$28,000
6,000
130,000
70,000
164,000
$398,000
$12,000
8.000
20,000
50,000
48,000
$138,000
Change
$16,000 increase
2,000 decrease
110,000 increase
20,000 increase
116,000 increase
COMPUTER SERVICES COMPANY
Income Statement
For the Year Ended December 31, 2001
Revenues
Cost of goods sold
Operating expenses
$507,000
$150,000
111,000
Depreciation expense
9,000
Loss on sale of equipment
3,000
Interest expense
42,000 315,000
Income from operations
Income tax expense
Net income
192,000
47,000
$145,000
Illustration 13-14
Second-Year Operations
Additional Information:
(1) The company declared and paid a $29,000 cash dividend.
(2) The company obtained land through the issuance of $110,000 of long-term
bonds.
(3) An office building costing $120,000 was purchased for cash; equipment
costing $25,000 was also purchased for cash.
(4) The company sold equipment with a book value of $7,000 (cost $8,000 less
accumulated depreciation $1,000) for $4,000 cash.
(5) The company issued common stock for $20,000 cash.
(6) Depreciation expense was $6,000 for the building and $3,000 for the
equipment.
Determine the Net Increase or
Decrease in Cash
Cash increased $22,000
($55,000-$33,000)
Determine Net Cash Provided/Used
Operating Activities
By
Adjust net income for items that did
not affect cash.
For example:

Add back non-cash expenses (depreciation, amortization,
depletion
 Deduct Gains
 Add back Losses
 Changes in Current assets
 Changes in Current liabilities
Determine Net Cash Provided/Used
Operating Activities
By
Depreciation expense – The company reported
depreciation expense of $9,000.
 Depreciation and other charges that do not
require the use of cash, such as amortization of
intangible assets are added to net income.

Computer Services Company
Statement of Cash Flows (Partial)
For the Year Ended December 31
Cash flows from operating activities
Net Income
$145,000
Adjustments to reconcile net income
to net cash provided by operating
activities :
Depreciation expense
$9,000
INDIRECT METHOD
Determine Net Cash Provided/Used
Operating Activities



By
Loss on Sale of Equipment – The company
reported a $3,000 loss on the sale of equipment
(book value $7,000 less cash proceeds $4,000).
The loss reduced net income but did not reduce
cash.
The $3,000 loss is added to net income in
determining net cash provided by operating
activities.
Computer Services Company
Statement of Cash Flows (Partial)
For the Year Ended December 31
Cash flows from operating activities
Net Income
$145,000
Adjustments to reconcile net income
to net cash provided by operating
activities :
Depreciation expense
$9,000
Loss on sale of equipment
3,000
INDIRECT METHOD
Determine Net Cash Provided/Used
By Operating Activities
Current Assets
 Accounts Receivable - Accounts
receivable decreases during the period
because cash receipts are higher than
revenues reported on an accrual basis. The
decrease of $10,000 must be added to net
income, as a cash inflow. Why? You collected
the cash!
COMPUTER SERVICES COMPANY
Comparative Balance Sheet
December 31
Assets
Cash
Accounts receivable
Inventory
Prepaid Expenses
Land
Building
Accumulated
depreciation-building
Equipment
Accumulated
depreciation-equipment
Total
2011
$55,000
20,000
15,000
5,000
130,000
160,000
2010
$33,000
30,000
10,000
1,000
20,000
40,000
Change
Increase/Decrease
$22,000 increase
10,000 decrease
5,000 increase
4,000 increase
110,000 increase
120,000 increase
(11,000)
27,000
(5,000)
10,000
6,000 increase
17,000 increase
(3,000)
$398,000
(1,000)
$138,000
2,000 increase
Computer Services Company
Statement of Cash Flows (Partial)
For the Year Ended December 31
Cash flows from operating activities
Net Income
$145,000
Adjustments to reconcile net income
to net cash provided by operating
activities :
Depreciation expense
$9,000
Loss on sale of equipment
3,000
Decrease in accounts receivable
10,000
INDIRECT METHOD
Determine Net Cash Provided/Used
Operating Activities
By
 Inventory-
Inventory increases during a
period when merchandise purchases
exceed the cost of goods sold. Or, you spent
cash on inventory that you haven’t “expensed”
yet through cost of goods sold. The increase of
$5,000 in inventory must be deducted from
net income as it is a cash outflow.
Computer Services Company
Statement of Cash Flows (Partial)
For the Year Ended December 31
Cash flows from operating activities
Net Income
$145,000
Adjustments to reconcile net income
to net cash provided by operating
activities :
Depreciation expense
$9,000
Loss on sale of equipment
3,000
Decrease in accounts receivable
10,000
Increase in inventory
(5,000)
INDIRECT METHOD
Determine Net Cash Provided/Used
By Operating Activities
 Prepaid
Expenses - Prepaid expenses
increase during a period because cash paid
for expenses is greater than expenses
reported on an accrual basis.
 The increase of $4,000 in prepaid expenses
must be deducted from net income.
Computer Services Company
Statement of Cash Flows (Partial)
For the Year Ended December 31
Cash flows from operating activities
Net Income
$145,000
Adjustments to reconcile net income
to net cash provided by operating
activities :
Depreciation expense
$9,000
Loss on sale of equipment
3,000
Decrease in accounts receivable
10,000
Increase in inventory
(5,000)
Increase in prepaid expenses
(4,000)
INDIRECT METHOD
Determine Net Cash Provided/Used
By Operating Activities
 Accounts
Payable - The increase of
$55,000 in accounts payable must be
added to net income. Why? This means
the company received more inventory (and
other items) than it actually paid for). Cash
inflow
COMPUTER SERVICES COMPANY
Comparative Balance Sheet
December 31
Liabilities and
Stockholders’ equity
Accounts payable
Income tax payable
Bonds payable
Common stock
Retained earnings
Total
2011
2010
$28,000
6,000
130,000
70,000
164,000
$398,000
$12,000
8.000
20,000
50,000
48,000
$138,000
Change
$16,000 increase
2,000 decrease
110,000 increase
20,000 increase0
116,000 increase
Determine Net Cash Provided/Used
By Operating Activities
Taxes Payable – The decrease
of $2,000 in accounts payable must be
subtracted from net income. Why? This
 Income
means the company owed money, but then
paid some of it – Cash outflow
Computer Services Company
Statement of Cash Flows (Partial)
For the Year Ended December 31
Cash flows from operating activities
Net Income
Adjustments to reconcile net income
to net cash provided by operating
activities :
Depreciation expense
Loss on sale of equipment
Decrease in accounts receivable
Increase in inventory
Increase in prepaid expenses
Increase in accounts payable
Decrease in income taxes payable
Net Cash provided by operating activities
INDIRECT METHOD
$145,000
$9,000
3,000
10,000
(5,000)
(4,000)
16,000
(2,000)
$172,000
Determine Net Cash Provided/Used
By Investing Activities

Study the balance sheet to determine changes in
noncurrent assets.
 Changes in each noncurrent account are analyzed
using selected transaction data to determine the
effect, if any, the changes had on cash.
Determine Net Cash Provided/Used
By Investing Activities
 Land
- Land of $110,000 was purchased
through the issuance of long-term bonds.
 Although the exchange of bonds payable
for land has no effect on cash, it is a
significant noncash investing and
financing activity that must be disclosed.
COMPUTER SERVICES COMPANY
Comparative Balance Sheet
December 31
Assets
Cash
Accounts receivable
Inventory
Prepaid Expenses
Land
Building
Accumulated
depreciation-building
Equipment
Accumulated
depreciation-equipment
Total
2011
$55,000
20,000
15,000
5,000
130,000
160,000
2010
$33,000
30,000
10,000
1,000
20,000
40,000
Change
Increase/Decrease
$22,000 increase
10,000 decrease
5,000 increase
4,000 increase
110,000 increase
120,000 increase
(11,000)
27,000
(5,000)
10,000
6,000 increase
17,000 increase
(3,000)
$398,000
(1,000)
$138,000
2,000 increase
Determine Net Cash Provided/Used
By Investing Activities
 Building
- An office
building was acquired
using cash of $120,000.
 This transaction is a
cash outflow reported
in the investing
activities section.
Determine Net Cash Provided/Used
By Investing Activities

Equipment - The equipment account increased
$17,000.
 The additional information provided, reveals that
this was a net increase resulting from two
transactions
 (1) a purchase of equipment for $25,000
 (2) sale of equipment costing $8,000 for $4,000.
 The purchase of equipment should be shown as a
$25,000 outflow of cash and the sale of equipment
should be shown as a cash inflow of $4,000.
COMPUTER SERVICES COMPANY
Comparative Balance Sheet
December 31
Assets
Cash
Accounts receivable
Inventory
Prepaid Expenses
Land
Building
Accumulated
depreciation-building
Equipment
Accumulated
depreciation-equipment
Total
2011
$55,000
20,000
15,000
5,000
130,000
160,000
2010
$33,000
30,000
10,000
1,000
20,000
40,000
Change
Increase/Decrease
$22,000 increase
10,000 decrease
5,000 increase
4,000 increase
110,000 increase
120,000 increase
(11,000)
27,000
(5,000)
10,000
6,000 increase
17,000 increase
(3,000)
$398,000
(1,000)
$138,000
2,000 increase
Reminder – sale of Long Term
Asset
Cash
Accumulated Depreciation
Loss on Sale of Equipment
Equipment
4,000
1,000
3,000
8,000
Equipment
Beg. Balance
10,000
Purchase
25,000
End Balance
27,000
Equipment sold
8,000
Computer Services Company
Statement of Cash Flows (Partial)
For the Year Ended December 31
Cash flows from operating activities
Net Income
Adjustments to reconcile net income
to net cash provided by operating
activities :
Depreciation expense
Loss on sale of equipment
Decrease in accounts receivable
Increase in inventory
Increase in prepaid expenses
Increase in accounts payable
Decrease in income taxes payable
Net Cash provided by operating activities
Cash flows from Investing activities
Purchase of building
Purchase of equipment
Sale of equipment
Net Cash Flow from Investing
INDIRECT METHOD
$145,000
$9,000
3,000
10,000
(5,000)
(4,000)
16,000
(2,000)
$172,000
(120,000)
(25,000)
4,000
(141,000)
Determine Net Cash Provided/Used
By Financing Activities
 Bonds
Payable - The bonds payable
account increased by $110,000. The
issuance of bonds for land is a noncash
transaction reported in a separate
schedule at the bottom of the statement
of cash flows.
COMPUTER SERVICES COMPANY
Comparative Balance Sheet
December 31
Liabilities and
Stockholders’ equity
Accounts payable
Income tax payable
Bonds payable
Common stock
Retained earnings
Total
2011
2010
$28,000
6,000
130,000
70,000
164,000
$398,000
$12,000
8.000
20,000
50,000
48,000
$138,000
Change
$16,000 increase
2,000 decrease
110,000 increase
20,000 increase0
116,000 increase
Determine Net Cash Provided/Used
By Financing Activities
 Common
Stock- increased by $20,000.
The additional information notes that this
was for cash.
Determine Net Cash Provided/Used
By Financing Activities




Retained Earnings - Retained Earnings increased
by $116,000.
The increase is a net of
 (1) Net income of $145,000 that increased
Retained Earnings and
 (2) dividends of $29,000 that decreased
Retained earnings.
Net income is converted to net cash provided by
operations.
Payment of the dividend is a cash outflow that is
reported as a financing activity.
Free Cash Flow
Free Cash Flow =
+ Cash from Operating Activities
- Capital Expenditures
- Cash Dividends
Free Cash Flow means the cash left over from
operations after adjustment for capital expenditures
and dividends.
COMPUTER SERVICES COMPANY
CASH FLOW STATEMENT
DEC. 31, 2011
CASH FLOW FROM OPERATING ACTIVITIES
NET INCOME
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH:
Depreciation Expense
Loss on sale of equipment
(Increase)/Decrease in Accounts Receivable
$
$
9,000
3,000
10,000
(Increase)/Decrease in Inventory
(5,000)
(Increase)/Decrease in Prepaid Expenses
Increase/(Decrease) in Accounts Payable
(4,000)
16,000
Increase/(Decrease) in Income Tax Payable
NET CASH PROVIDED BY OPERATING ACTIVITIES
145,000
(2,000)
27,000
172,000
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of Land
Purchase of Building
(120,000)
Purchase of Equipment
Sale of Equipment
(25,000)
4,000
NET CASH USED BY INVESTING ACTIVITIES
CASH FLOW FROM FINANCING ACTIVITIES
Issuance of common stock
Payment of cash Dividends
(141,000)
20,000
(29,000)
NET CASH USED BY FINANCING ACTIVITIES
(9,000)
NET INCREASE IN CASH
22,000
CASH AT THE BEGINNING OF THE PERIOD
33,000
CASH AT THE END OF THE PERIOD
$
55,000
NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of Bonds Payable to purchase land.
$
110,000
Supplementary Material

Cash Flow and the Product Life Cycle
For Computer Services…
Free Cash Flow:
$172,000
-141,000*
-29,000
$ 2,000
*this calculation subtracts the proceeds from the Sale of Equipment
from Capital Expenditure
Supplementary Material

Cash Flow and the Product Life Cycle
The Product Life Cycle
A series of phases all products go
through
 The phases are often referred to as the:
 introductory phase
 growth phase
 maturity phase
 decline phase.
 The phase a company is in affects its
cash flows.

Introductory Phase
To support asset purchases the
company may issue stock or debt.
Expect:
 cash from operations to be negative
 cash from investing
to be
negative.
 cash from financing
to be
positive.
Growth Phase
The company is striving to expand its
production and sales.
Expect:
 small amounts of cash to be
generated from operations.
 cash from investing to be negative.
 cash from financing to be positive
Maturity Phase
Sales and production level-off
Expect:
 cash from operations to exceed
investing needs
 cash from investing
to be
neutral
 cash from financing
to be
negative
Decline Phase
Sales and production decline
Expect:
 cash from operations to decline
 cash from investing to
possibly become
positive
 cash from financing
to possibly become
negative
Be prepared to….
Review a Cash Flow Statement
 Discuss WHERE a company appears to
be in the Product Life Cycle, based on
evidence in its Cash Flow Statement

Mystery Company….
Period Ending
Dec 26, 2009
Dec 27, 2008
Dec 29, 2007
6,796,000
6,999,000
6,934,000
Total Cash Flow From Operating
Activities
Investing Activities, Cash Flows Provided By or Used In
Total Cash Flows From
(2,401,000)
(2,667,000)
(3,744,000)
Investing Activities
Financing Activities, Cash Flows Provided By or Used In
Total Cash Flows From
(2,497,000)
(3,025,000)
(19,000)
(153,000)
(4,006,000)
Financing Activities
Effect Of Exchange Rate Changes
75,000
Change In Cash and Cash
1,879,000
1,154,000
Equivalents
To the best of your ability….what stage in
the Product Life Cycle is this company?
(741,000)
Possible answer


Cash from Ops is positive
Cash from Investing is negative
This is strong evidence the company is growing,
investing in new stores, manufacturing plants, new
equipment or buildings
That cash from financing is negative is confusing,
however, it could mean that this is an established
company that is paying back creditors and also paying
dividends, but still expanding. And its strong positive
cash flow from operations is a sign of growth and
overall financial strength
And the company is…..
End of Chapter 13
Good Bye and Good Luck.