Statement of Cash Flows
answers questions such as:
• 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 pay its customary cash
dividend?
• 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?
Statement of Cash Flows
• Reports 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 activities
Statement of Cash Flows:
Investing Activities
Cash Received From:
• Collection of principal from debtors
• Sale of loans to third parties
• Sale of debt or equity securities of other entities
• Sale of property, plant & equipment
Cash Paid For:
• Loans made or purchased by the entity
• Purchase of debt or equity securities of other
entities
• Purchase of property, plant & equipment
Statement of Cash Flows:
Financing Activities
Cash Received From:
• Issuance of equity securities (stock)
• Sale of bonds, mortgages, notes & other shortterm or long-term borrowings
Cash Paid For:
• Cash dividends
• Purchase of treasury stock
• Repayment of principal on amounts borrowed
Statement of Cash Flows:
Operating Activities
Cash Received From:
• Producing & selling goods
• Providing services
• Interest
• Dividends
• other
Cash Paid For:
• Inventory
• Salaries & wages
• Taxes, duties, fines, fees, penalties
• Interest
• Other expenses
Balance Sheet: 8 Major Classifications
1) Current Assets
6) Current Liabilities
– Cash
7) Long-Term Liabilities
– Short-Term Investments 8) Owners’ Equity
– Receivables
– Inventories
– Prepaid Expenses
2) Long-Term Investments
3) Property, Plant &
Equipment
4) Intangible Assets
5) Other Assets
–
–
–
–
–
Capital Stock
Additional Paid-in Capital
Retained Earnings
Treasury Stock
Other Items of
Comprehensive Income
Statement of Cash Flows:
Direct vs. Indirect Methods
Direct Method
• Requires a supplemental
reconciliation of net
income to cash flow from
operating activities.
• Net income is
reconstructed on a cash
basis.
• Used by 2.5% of
companies.
Indirect Method
• No supplemental
schedule is required.
• Net income is reconciled
to cash flow from
operating activities.
• Used by 97.5% of
companies.
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
Statement of Cash Flows
• Reports 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 activities
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
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-today activities.
Evaluate Financial Liquidity:
Net Cash Provided by Operations
Average Current Liabilities
= Current Cash Debt Coverage Ratio
Evaluate Financial Flexibility:
Net Cash Provided by Operations
Average Total Liabilities
= Cash Debt Coverage Ratio
Evaluate Financial Flexibility:
Net Cash Provided by
Operations
- Capital Expenditures
- Cash used for dividends
= Free Cash Flow