Reporting and Interpreting
the Statement of Cash Flows
Learning Objective 1
Identify cash flows arising
from operating, investing,
and financing activities.
12-1
Business Activities and Cash Flows
The Statement of Cash
Flows focuses
attention on:
Operations
Cash received and paid
for day-to-day activities
with customers, suppliers,
and employees.
Investing
Cash paid and received
from buying and selling
long-term assets.
12-2
Financing
Cash received and paid
for exchanges with
lenders and stockholders.
Business Activities and Cash Flows
Checking and
Savings Accounts
Cash
Currency
Cash Equivalents
Highly liquid short-term investments
within three months of maturity.
12-3
Classifying Cash Flows
UNDER ARMOUR, INC
Condensed Statement of Cash flows
For the Year Ended December 31, 2008
(in millions)
Net cash provided (used) by Operating Activities
79
Net cash provided (used) by Investing Activities
(38)
Net cash provided (used) by Financing activities
21
Net change in Cash and Cash Equivalents
62
Cash and Cash Equivalents, beginning of year
40
Cash and Cash Equivalents, end of year
12-4
$
$
102
Operating Activities
Cash inflows and outflows that directly relate to
revenues and expenses reported on the income
statement.
12-5
Direct and Indirect Reporting
of Operating Cash Flows
Same result
We will concentrate on the indirect method for now, and we
will look at the direct method again later in the chapter.
12-6
Investing Activities
Under Armour’s 2008 Investing Activities
12-7
Financing Activities
Under Armour’s 2008 Financing Activities
12-8
Relationships Between Classified
Balance Sheet and Statement of Cash
Flow (SCF) Categories
SCF Categories
SCF Categories
Classified Balance Sheet Categories
Operating
Operating
Current
Current Assets
Assets
Current
Current Liabilities
Liabilities
Investing
Investing
Noncurrent
Noncurrent Assets
Assets
Noncurrent Liabilities
Financing
12-9
Classified Balance Sheet Categories
Stockholders' Equity
Relationship to Other Financial
Statements
Information needed to prepare a statement
of cash flows:
 Comparative Balance Sheets.
 Income Statement.
 Additional details concerning
selected accounts.
12-10
Relationship to Other Financial Statements
Recall that the basic Balance Sheet equation is:
We can recast the equation as follows:
The following equation is true:
From this basic Balance Sheet equation, we
develop our model to solve for the change in cash:
12-11
Learning Objective 2
Report cash flows from
operating activities, using
the indirect method.
12-12
Cash Flows from Operating Activities Indirect Method
The indirect method adjusts net income
by analyzing noncash items.
Changes in current assets
and current liabilities.
Cash Flows from
Operating
Activities Indirect Method
Net
Income
+ Noncash expenses
such as
depreciation and
amortization.
12-13
+ Losses and Gains
Relationships to the Balance Sheet and
the Income Statement
Change in account
balances during the year
Increase
Decrease
Current Assets
Subtract from
net income.
Add to
net income.
Current Liabilities
Add to
net income.
Subtract from
net income.
Use this table when adjusting Net Income to Operating
Cash Flows using the indirect method.
12-14
Statement of Cash Flows
Indirect Method Example
Use the following financial statements for Under Armour, Inc. and prepare
the Statement of Cash Flows for the year ended December 31, 2008.
UNDER ARMOUR, INC.
Balance Sheet
(in millions)
ASSETS
Current assets:
Cash & Cash Equivalents
Accounts Receivable
Inventories
Prepaid Expenses
Total Current Assets
Equipment
Less: Accumulated depreciation
Intangible and Other Assets
Total Assets
12-15
December 31,
2008
$
$
102
81
182
31
396
120
(47)
18
487
December 31,
2007
$
$
40
94
166
22
322
84
(31)
16
391
Change
62
(13)
16
9
36
(16)
2
Statement of Cash Flows
Indirect Method Example
UNDER ARMOUR, INC.
Balance Sheet
(in millions)
December 31,
2008
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable
$
Accrued Liabilities
Total Current Liabilities
Long-term Debt
Total Liabilities
Stockholders' Equity:
Contributed Capital
Retained Earnings
Total Stockholders' Equity
Total Liab. & Stockholders' Equity
12-16
72
61
133
23
156
175
156
331
487
December 31,
2007
$
Change
55
41
96
14
110
17
20
163
118
281
391
12
38
9
Statement of Cash Flows
Indirect Method Example
UNDER ARMOUR, INC.
Income Statement
(in millions)
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general, and administative expenses
Depreciation
Total operating expenses
Income from Operations
Interest Expense
Income before Income Tax Expense
Income Tax Expense
Net income
12-17
Year ended
Dec. 31, 2008
$
725
370
355
$
262
16
278
77
7
70
32
38
The Statement
of Cash Flows
using the
indirect
method will
begin with
Under Armor,
Inc.’s net
income from
the Income
Statement.
Direct and Indirect Reporting
of Operating Cash Flows
Net Income
Items included in net income that do not involve cash
+ Depreciation
Changes in operating assets and liabilities
+ Decreases
Changes inincurrent
currentassets
assetsand current liabilities:
– Increases in current assets
– Decreases in current liabilities
+ Increases in current liabilities
Net cash provided (used) by operating activities
When using the indirect method, start with accrual basis net income
and adjust it for:
1. items that are included in net income but do not involve cash, and
2. items that are not included in net income but do involve cash.
12-18
UNDER ARMOUR, INC.
Statement of Cash flows
For the Year Ended December 31, 2008
(in millions)
Cash Flows from Operating Activities:
Net Income
$
38
Next, adjust for the non-cash items included
in net income.
For Under Armour, the only non-cash adjustment
is for depreciation.
12-19
UNDER ARMOUR, INC.
Statement of Cash flows
For the Year Ended December 31, 2008
(in millions)
Cash Flows from Operating Activities:
Net Income
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation
$
38
16
Accumulated Depreciation increased by $16, from $31 in the
2007 Balance Sheet to $47 in the 2008 Balance sheet. The same
$16 is shown as Depreciation in the 2008 Income Statement.
To complete the cash flows from operating activities section, we
must examine comparative balance sheets to determine the
changes in current assets and current liabilities from the
beginning of the period to the end of the period.
12-20
ARMOUR,
INC.
Statement ofUNDER
Cash
Flows
Indirect
Statement of Cash flows
MethodFor
Example
the Year Ended December 31, 2008
These five items were shown earlier in the current portions of Under
(in millions)
Armour’s comparative Balance Sheets for 2007 and 2008
Cash Flows from Operating Activities:
Net Income
$
38
Current Assets
Current Liabilities
Subtract from
Add to
Adjustments
Increase to reconcile net income to net
net income.
net income.
cash provided by operating
activities:
Add to
Subtract from
Decrease
net income.
Depreciation net income.
16
Changes in current assets and current liabilities:
Decrease in Accounts Receivable
13
Increase in Inventory
(16)
Increase in Prepaid Expense
(9)
Increase in Accounts Payable
17
Increase in Accrued Liabilities
20
Net cash provided (used) by operating activities
$
79
12-21
Learning Objective 3
Report cash flows from
investing activities.
12-22
Reporting Cash Flows from Investing
Activities
We will need this additional data to prepare
the investing portion of the statement.
1. No disposals or impairments of
equipment or intangibles occurred
2. Equipment costing $36 million and
intangibles costing $2 million were
purchased with cash.
12-23
Reporting Cash Flows from Investing
Activities
UNDER ARMOUR, INC.
Statement of Cash flows
For the Year Ended December 31, 2008
(in millions)
Net cash provided (used) by operating activities
Cash Flows from Investing Activities:
Purchase of equipment
Purchase of intangible and other assets
Net cash provided (used) by investing activities
$
79
(36)
(2)
(38)
Cash Flows
from Financing
Activities:
Under
Armour,
Inc.,
has
two investing activities
Additional borrowings of long-term debt
16
on long-term
(7)
on thePayments
Statement
of debt
Cash Flows that required
Proceeds from stock issuance
12
theNet
use
ofprovided
cash:by (used in) financing activities
cash
21
Net increase (decrease) in cash & cash equivalents
62
1. Purchase
of
equipment,
and
Cash & cash equivalents at beginning of period
40
Cash & cash equivalents
at end of period
$ 102
2. Purchase
of intangible
and other assets.
12-24
Learning Objective 4
Report cash flows from
financing activities.
12-25
Reporting Cash Flows from Financing
Activities
We will need this additional data to prepare
the financing portion of the statement.
1. No dividends were declared or paid.
2. Long-term debt of $7 million was paid.
3. $16 million in new long-term loans were issued.
4. Shares of stock were issued for $12 million.
12-26
Reporting Cash Flows from Financing
Activities
UNDER ARMOUR, INC.
Statement of Cash flows
For the Year Ended December 31, 2008
(in millions)
Net cash provided (used) by operating activities
Cash Flows from Investing Activities:
Purchase of equipment
Purchase of intangible and other assets
Net cash provided (used) by investing activities
$
79
(36)
(2)
(38)
Cash Flows from Financing Activities:
Additional borrowings of long-term debt
16
Payments on long-term debt
(7)
Proceeds from stock issuance
12
Long-term
debt
increased
because
of
$16
in
Net cash provided by (used in) financing activities
21
Netnew
increase
(decrease)
in the
cash year.
& cash The
equivalents
62
loans
during
long-term debt
Cash & cash equivalents at beginning of period
40
increase is a cash inflow.
Cash & cash equivalents at end of period
$ 102
12-27
Reporting Cash Flows from Financing
Activities
UNDER ARMOUR, INC.
Statement of Cash flows
For the Year Ended December 31, 2008
(in millions)
Net cash provided (used) by operating activities
Cash Flows from Investing Activities:
Purchase of equipment
Purchase of intangible and other assets
Net cash provided (used) by investing activities
$
79
(36)
(2)
(38)
Cash Flows from Financing Activities:
Additional borrowings of long-term debt
16
Payments on long-term debt
(7)
Proceeds from stock issuance
12
Payments
on
long-term
debt
resulted
in
a
cash
outflow
Net cash provided by (used in) financing activities
21 of $7.
Netnet
increase
(decrease)
in cash
cash equivalents
62
The
effect
of these
two&long-term
debt transactions
Cash & cash equivalents at beginning of period
increased
long-term debt by $9, from $14 on the 40
2007
Cash & cash equivalents at end of period
$ 102
Balance sheet to $23 on the 2008 Balance Sheet.
12-28
Reporting Cash Flows from Financing
Activities
UNDER ARMOUR, INC.
Statement of Cash flows
For the Year Ended December 31, 2008
(in millions)
Net cash provided (used) by operating activities
Cash Flows from Investing Activities:
Purchase of equipment
Purchase of intangible and other assets
Net cash provided (used) by investing activities
$
79
(36)
(2)
(38)
Cash Flows from Financing Activities:
Additional borrowings of long-term debt
16
Payments on long-term debt
(7)
Proceeds from stock issuance
12
Net cash provided by (used in) financing activities
21
The third
activityiniscash
the&issuance
of common stock
Net financing
increase (decrease)
cash equivalents
62resulting
in a cashCash
inflow
of $12.
Contributed
Capital
increased from40
$163 in the
& cash
equivalents
at beginning
of period
Cash
cash equivalents
of period
$ Sheet.
102
2007& Balance
Sheet at
toend
$175
in the 2009 Balance
12-29
Reporting Cash Flows from Financing
Activities
UNDER ARMOUR, INC.
Now we can reconcile
the change in cash to the ending
Statement of Cash flows
$102 cash balance
that
appears
on31,the
For the Year
Ended
December
2008Balance Sheet.
(in millions)
Net cash provided (used) by operating activities
12-30
$
79
Cash Flows from Investing Activities:
Purchase of equipment
Purchase of intangible and other assets
Net cash provided (used) by investing activities
(36)
(2)
(38)
Cash Flows from Financing Activities:
Additional borrowings of long-term debt
Payments on long-term debt
Proceeds from stock issuance
Net cash provided by (used in) financing activities
Net increase (decrease) in cash & cash equivalents
Cash & cash equivalents at beginning of period
Cash & cash equivalents at end of period
16
(7)
12
21
62
40
102
$
Noncash Investing and Financing
Activities
Required
(in millions) Supplemental Information:
Net cash provided (used) by operating activities
$
79
1. Cash paid for taxes and interest.
Flows from Investing Activities:
2.Cash
Significant
non-cash investing and financing
Purchase of equipment
(36)
activities.
Purchase of intangible and other assets
(2)
Net cash provided (used) by investing activities
(38)
Cash Flows from Financing Activities:
Additional borrowings of long-term debt
Payments on long-term debt
Proceeds from stock issuance
Net cash provided by (used in) financing activities
Net increase (decrease) in cash & cash equivalents
Cash & cash equivalents at beginning of period
Cash & cash equivalents at end of period
16
(7)
12
21
62
40
102
Supplemental Disclosures
Cash paid for interest
Cash paid for income tax
12-31
$
$
7
12
Learning Objective 5
Interpret cash flows from
operating, investing, and
financing activities.
12-32
Evaluating Cash Flows
• Operating cash flows must
be positive over the longrun for a company to be
successful.
• An upward trend in
operating cash flows over
time indicates growth and
efficient operations.
12-33
Evaluating Cash Flows
Quality of
Income
Ratio
=
Net Cash Flow from Operating Activities
Net Income
A measure for determining what portion of
a company’s income was generated in cash.
A ratio near 1.0 indicates a high likelihood that
revenues are realized in cash and that expenses
are associated with cash outflows.
Quality of
Income
Ratio
12-34
=
79
38
= 2.08 for Under Armour in 2008
Evaluating Cash Flows
Capital
Acquisitions =
Ratio
Net Cash Flow from Operating Activities
Cash Paid for Property, Plant, and Equipment
A measure for determining whether a company is generating
enough cash internally to purchase long-term assets.
A ratio greater than 1.0 indicates that outside
financing was not needed to purchase long-term assets.
Capital
Acquisitions =
Ratio
12-35
79
36
= 2.19 for Under Armour in 2008