Chapter 12
Statement of Cash Flows
 Libby Libby Short: Chapter 12
 Solid Footing: 11-12
Copyright © 2018 A Roy Bardhan
12-1
Understanding the Business
Positive cash flows permit a company to . . .
Pay
dividends to
owners.
Take
advantage of
investment
opportunities.
Expand its
operations.
Replace
worn assets.
Some Wall Street analysts consider it important to
understand the various sources and uses of cash that are
associated with business activity.
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12-2
What Is Cash?
1)
Currency
2)
Cash Equivalents
 Short-term, highly liquid investments.
 Readily convertible into cash.
 So near maturity that market value is unaffected by
interest rate changes (i.e., they have original
maturities of less than three months).
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12-3
Relationships to the Balance Sheet and Income Statement
Information needed to prepare a statement of cash flows:
Comparative balance sheets
 A complete income statement
 Additional details concerning selected accounts

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12-4
Relationships to the Balance Sheet and Income Statement
Assets = Liabilities + Stockholders’ Equity
Cash Assets + Non cash assets = Liabilities + Stockholders’ Equity
Cash Assets = Liabilities + Stockholders’ Equity - Non cash assets
Δ Cash = Δ Liabilities + Δ Stockholders’ Equity – Δ Noncash Assets
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12-5
Classifications of the Statement of Cash Flows
Operating Activities
Cash inflows and outflows directly related
to earnings from normal operations.
Investing Activities
Cash inflows and outflows related to the
acquisition or sale of productive facilities
and investments in the securities of other
companies.
Financing Activities
Cash inflows and outflows related to
external sources of financing (owners and
creditors) for the enterprise.
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12-6
Exhibit 12.1
Consolidated Statement of Cash Flows
NATIONAL BEVERAGE CORP.
Consolidated Statement of Cash Flows*
Year Ended May 3, 2014 (In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization
Changes in assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses
Accounts payable
Accrued expenses
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant, and equipment
Proceeds from disposal of property, plant, and equipment
Purchase of short-term investments
Proceeds from sale of short-term investments
Net cash used by investing activities
Cash flows from financing activities:
Repayment of principal on long-term debt
Proceeds from issuance of long-term debt
Repurchase of stock
Proceeds from issuance of stock
Payment of cash dividends
Net cash used by financing activities
Net Increase (Decrease) in Cash and Equivalents
Cash and Equivalents—Beginning of Year
Cash and Equivalents—End of Year
$43,635
10,063
5,864
(4,680)
(2,699)
1,345
(259)
53,269
(12,124)
62
(1,463)
2,443
(11,082)
(22,772)
—
(7,024)
—
(726)
(30,522)
11,665
18,267
$29,932
This ending cash
balance should
agree with the
balance sheet.
*Certain amounts have been adjusted for pedagogical purposes.
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12-7
Direct Method vs. Indirect Method
Two Formats for Reporting Operating Activities
Direct Method
Indirect Method
Reports the cash effects
of each operating activity
Starts with accrual net
income and converts to
cash flow from operating
activities
The cash flows from operating activities are always the same,
regardless of whether the direct or indirect method is used.
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12-8
Statement of Cash Flows
Increase in Assets =
Cash
Decrease in Assets = Cash
Increase in Liabilities = Cash
Decrease in Liabilities = Cash
12-9
Cash Flows from Operating Activities – Indirect method
Net Income
Inflows
 Effects of non cash items
o Depreciation &
amortization
o Loss on sale of assets
 Decrease in operating
assets
 Increase in operating
liabilities
+ Inflows
Outflows
 Effects of non cash items
o Gain on sale of assets
 Increase in operating
assets
 Decrease in operating
liabilities
_ Outflows
Cash Flows
from Operating
Activities
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12-10
Adjustment for non cash items - Gains and Losses
Gains
Losses
Gains would have been added in the
Income Statement and therefore must be
subtracted from net income to avoid
double counting the gain.
Losses would have been subtracted in the
Income Statement and therefore must be
added to net income to avoid double
counting the loss.
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12-11
Chapter Supplement B: Adjustment for Gains and Losses on
Sale of Long-Term Assets—Indirect Method
Property, plant, and equipment with an original cost of $10,000 and
accumulated depreciation of $4,000 is sold for $8,000 cash.
Cash (+A) ….….………………………………………………………………………..
Accumulated depreciation (–XA, +A) ……………………………………..
Property, plant, and equipment (–A) ………………………………….
Gain on disposal (+Gain, +SE) ($8,000 – $6,000) …………………
8,000
4,000
10,000
2,000
Because the gain is included in the computation of income, it is
necessary to remove (subtract) the $2,000 gain from the Operating
Activities section of the statement to avoid double counting.
The $8,000 cash received from the sale is reported
as an investing cash inflow.
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12-12
Interpreting Cash Flows from Operating Activities
A common rule of thumb followed by financial and credit analysts is to
avoid firms with rising net income but falling cash flow from operations.
Investors will not invest in a company if they do not believe that cash
generated from operations will be available to pay them dividends or
expand the company.
Creditors will not lend money if they do not believe that cash
generated from operations will be available to pay back the loan.
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12-13
Free Cash Flow
FINANCIAL ANALYSIS
$$$
Free Cash Flow = Cash Flow from Operating Activities
– Dividends – Capital
Expenditures
In general, this measures a firm’s ability to pursue
long-term investment opportunities.
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12-14
Reporting and Interpreting Cash Flows from Investing
Activities
Related Balance
Sheet Account(s)
Property, plant, and
equipment and intangible
assets (patents, etc.)
Short- or long-term
investments (stocks and
bonds of other companies)
Investing Activity
Cash Flow Effect
Outflow
Purchase of property,
plant, and equipment or
intangible assets for cash Inflow
Sale of property, plant, and
equipment or intangible
Outflow
assets for cash
Purchase of investment
Inflow
securities for cash
Sale (maturity) of
investment securities for
cash
Remember that:
• Only purchases paid for with cash or cash equivalents are included.
• The amount of cash that is received from the sale of assets is included,
regardless of whether the assets are sold at a gain or loss.
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12-15
Cash Flows from Investing Activities
Inflows
Cash received from:
 Sale or disposal of property,
plant, and equipment
 Sale or maturity of investments
in securities
Outflows
Cash paid for:
 Purchase of property, plant, and
equipment
 Purchase of investments in
securities
+ Inflows
Cash Flows from
Investing
Activities
_ Outflows
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12-16
Reporting Cash Flows from Financing Activities
Related Balance
Sheet Account(s)
Short-term debt (notes
payable)
Long-term debt
Common stock and
additional paid-in capital
Retained earnings
Financing Activity
Borrowing cash from banks
or other financial
institutions
Repayment of loan
principal
Issuance of bonds for cash
Repayment of bond
principal
Issuance of stock for cash
Repurchase (retirement) of
stock with cash
Payment of cash dividends
Cash Flow Effect
Inflow
Outflow
Inflow
Outflow
Inflow
Outflow
Outflow
Remember that:
• Cash repayments of principal are cash flows from financing activities.
• Interest payments are operating activities that are (already) included in the
Income Statement.
• Dividend payments are cash flows from financing activities.
• If debt or stock is issued for other than cash, it is not included in this section.
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12-17
Cash Flows from Financing Activities
Inflows
Cash received from:
 Borrowings on notes, mortgages,
bonds, etc., from creditors
 Issuing stock to owners
Outflows
Cash paid for:
 Repayment of principal to creditors
(excluding interest, which is an
operating activity)
 Repurchasing stock from owners
 Dividends to owners
+ Inflows
Cash Flows from
Financing
Activities
_ Outflows
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12-18
Interpreting Cash Flows from Financing Activities
The long-term growth of a company is normally financed from
three sources:
1. Internally generated funds (cash from operating activities)
2. The issuance of stock
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.
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12-19
Net Increase (Decrease) in Cash
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Beginning and
ending balances
from the
balance sheet
The combination of the net cash flows from operating, investing, and financing
activities must equal the net increase or decrease in cash.
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12-20
Completing the Statement and Additional Disclosures
1.
2.
3.
Three Required Disclosures
Reconciliation of net income to cash flow from operations
Noncash investing and financing activities
Cash paid for interest and income taxes
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12-21
Chapter Supplement C: T-Account Approach (Indirect
Method)
Based on the idea that changes in cash must equal the sum of the changes in
all other balance sheet accounts, we can use T-accounts to analyze cash flows
as follows:
1.
Prepare a single large T-account to represent the changes that have
taken place in cash, subdivided into the three sections of the cash flow
statement.
2.
Prepare additional T-accounts for all noncash balance sheet accounts,
entering the beginning and ending balance in each noncash balance
sheet T-account.
3.
Enter the transactions affecting cash in each noncash balance sheet
T-account and in the proper section of the cash T-account until all
changes in noncash balance sheet accounts have been accounted for.
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12-22
Exhibit 12.9
T-Account Approach to Preparing the Statement of Cash Flows (Indirect Method)
Panel A: Changes in Cash Account
Cash (A)
Operating
(1) Net Income
(2) Depreciation and Amortization
(3) Accounts Receivable
(6) Accounts Payable
43,635 4,680
10,063 2,699
5,864
259
1,345
(4) Inventory
(5) Prepaid Expense
(7) Accrued Expenses
Net cash flow provided by operating activities 53,269
Investing
62 12,124 (8) Purchases of Property, Plant, & Equipment
(9) Disposals of Property, Plant, & Equipment
2,443 1,463 (10) Purchases of Short-term Investments
(11) Sales of Short-term Investments
11,082
Net cash used in investing activities
Financing
22,772 (12) Payment of Long-Term Debt
7,024 (13) Repurchase of Stock
726 (14) Payment of Dividends
30,522 Net cash used in financing activities
Net increase in cash and cash equivalents
11,665
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12-23
Exhibit 12.9
T-Account Approach to Preparing the Statement of Cash Flows (Indirect Method)
Panel B: Changes in Noncash Accounts
Accounts
Receivable
(A)(A)
Accounts
Receivable
Beg. bal
64,069
End. bal
58,205
(3) Decrease 5,864
Accounts
Receivable
Accounts
Payable (A)
(L)
Beg. bal
44,261
(6) Increase
1,345
End. bal
45,606
Accounts
Receivable
(A) (A)
Short-Term
Investments
Beg. bal
39,234
(4) Increase
4,680
End. bal
43,914
Beg. bal
(13) Stock repurchased 6,864 Stock issued
End. bal
Beg. bal
(5) Increase
End. bal
Accrued Expenses (L)
(7) Increase
5,706
2,699
8,405
Property, Plant, & Equipment, Net (A)
Beg. bal
19,176
End. bal
18,917
259
Beg. bal
77,701 (2) Depreciation 10,063
62
(8) Purchases 12,124 (9) Disposals
End. bal
79,700
Common Stock (SE)
Long-Term Debt (L)
Beg. bal
3,665
(10) Purchases 1,463 (11) Disposals 2,443 (12) Payments
End. bal
2,685
Accounts
Receivable
Additional
Paid-in(A)
Capital (SE)
Prepaid Expenses (A)
Inventory (A)
Beg. bal 74,889
Beg. bal
0 (13) Stock repurchased 160 Stock issued
22,772 Borrowings
End. bal 52,117
End. bal
1,054
0
894
Retained Earnings (SE)
31,434
0 (14) Dividends
24,570
Beg. bal
726 (1) Net income
End. bal
37,828
43,635
80,737
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12-24