13 Statement of
Cash Flows
FINANCIAL
ACCOUNTING
2ND EDITION
PowerPoint Presentation by
Gail B. Wright
BY
DUCHAC, REEVE, & WARREN
Professor of Accounting
Bryant University
© Copyright 2007 Thomson South-Western, a part
of The Thomson Corporation. Thomson, the Star
Logo, and South-Western are trademarks used
herein under license.
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LG 1
CASH FLOW STATEMENT
• 3 sections reporting cash flows
from different activities
– Cash flows from operating activities
– Cash flows from investing activities
– Cash flows from financing activities
2
LG 1
CASH FLOWS: Operating Activities
• Most important cash flows of a business
• 2 methods
– Direct method
• Reports operating cash flows as sources, uses of
cash
– Indirect method
• Reports operating cash by adjusting accrual net
income to cash flows
3
LG 1
CASH FLOWS: Investing Activities
• Cash inflows from investing activities arise
from
– Selling fixed assets, investments, intangible
assets
• Cash outflows from investing activities
arise from
– Buying fixed assets, investments, intangible
assets
4
LG 1
CASH FLOWS: Financing Activities
• Cash inflows from financing activities arise
from
– Issuing debt, equity securities
• Cash outflows from financing activities
arise from
– (Re)Paying dividends, debt, purchasing
treasury stock
5
LG 1
EXERCISE 13-3a
Identify cash flow from operating activity.
1.
2.
3.
4.
5.
6.
Purchased patents
Purchased buildings
Purchased treasury stock
Sold equipment
Net income
Issued preferred stock
7. Redeemed bonds
8. Paid cash dividends
9. Sold long-term
investment
10. Issued common stock
11. Issued bonds
Click
button to
skip this
exercise
Press “Enter” or click left mouse button for answer.
6
LG 1
EXERCISE 13-3b
Identify cash flow from investing activity.
1.
2.
3.
4.
5.
6.
Purchased patents
Purchased buildings
Purchased treasury stock
Sold equipment
Net income
Issued preferred stock
7. Redeemed bonds
8. Paid cash dividends
9. Sold long-term
investment
10. Issued common stock
11. Issued bonds
Click
button to
skip this
exercise
Press “Enter” or click left mouse button for answer.
7
LG 1
EXERCISE 13-3c
Identify cash flow from financing activity.
1.
2.
3.
4.
5.
6.
Purchased patents
Purchased buildings
Purchased treasury stock
Sold equipment
Net income
Issued preferred stock
7. Redeemed bonds
8. Paid cash dividends
9. Sold long-term
investment
10. Issued common stock
11. Issued bonds
Click
button to
skip this
exercise
Press “Enter” or click left mouse button for answer.
8
LG 1
NONCASH ACTIVITIES
• Arise from investing, financing activities
– Examples
• Issue stock to retire long-term debt
• Issue stock, debt in exchange for fixed asset
– Has no direct effect on cash flows
– Disclosed in separate schedule
9
LG 3
CASH FLOWS: Direct Method
• Direct method
– Reports operating cash flows as sources, uses
of cash
– Adjusts certain income statement items for
changes in current assets, liabilities
10
LG 3
EXHIBIT 7
Rundell, Inc. current accounts used for Operating
cash flow under direct method
Continued
11
LG 3
EXHIBIT 7
Rundell, Inc. income statement items used for
Operating cash flow under direct method
12
LG 3
DIRECT METHOD:
Cash Received from Customers
Sales adjusted for change accounts receivable
13
LG 3
DIRECT METHOD:
Cash Paid for Inventory
Cost of inventory adjusted for changes in
inventory & accounts payable
14
LG 3
DIRECT METHOD:
Cash Paid for Operating Expenses
Operating expenses adjusted for changes in
accrued expenses
15
LG 3
DIRECT METHOD:
Cash Paid for Income Tax
Income tax expense adjusted for changes in
taxes payable
16
LG 3
EXHIBIT 8
17
LG 4
CASH CONVERSION CYCLE
• Cash conversion cycle
– Measures the cycle of
•
•
•
•
Buying inventory
Paying for inventory (account payable)
Selling inventory
Collecting account receivable
18
LG 4
CASH CONVERSION CYCLE:
Equation
Days’ sales in A/R = A/R / Ave daily net Sales
+
Days’ sales in inventory = Ave. Inv. / Ave CGM
Days’ sales in A/P = Ave. A/P / Ave CGM
19
LG 4
CASH CONVERSION CYCLE:
Calculation
Apple
# Days’ Sales
Receivables
Inventory
Accounts Payable
Conversion Cycle
34
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20
LG 4
ANALYSIS: Cash Conversion Cycle
• The more positive the conversion cycle, the
less efficient the operations
– Reduces amount of noncash current assets
– Increases level of current liabilities
– Releases cash for other purposes
• Negative cycles indicate highly efficient use
noncash working capital
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Inspiration of the Day
"To do carefully and constantly and
kindly many little things is not a little
thing"
- Author Unknown
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