Reporting and Analyzing
Cash Flows
Chapter 17
Purposes of the Statement
of Cash Flows
Designed to fulfill the following:
– predict future cash flows
– evaluate management decisions
– determine the ability to pay dividends plus
interest and principal
– show the relationship of net income to
changes in the firm’s cash
Cash Balance Includes...
– cash on hand.
– cash in the bank.
– cash equivalents.
Cash Equivalents Are....
…short-term, highly liquid investments
convertible into cash with little delay.
– money market accounts.
– U.S. Government Treasury bills.
Basic Organization of the
Statement of Cash Flows
A business may be evaluated in terms of three
types of business activities:
1 Operating activities
2 Investing activities
3 Financing activities
Operating Activities
 Related to transactions that make up net
income.
 Also affect current assets and current
liabilities on the balance sheet.
Operating Activities
Inflows – cash receipts
from earning
revenues




Sale of goods or
services
Interest revenue
Dividend revenue
Other revenues
Outflows – cash paid from
incurring expenses





Salaries and wages.
Payments to suppliers
for inventory.
Taxes and fines.
Interest paid to lenders
Other expenses
Focus your attention on:
income statement, and changes in
current assets, current liabilities
Investing Activities
 Investing activities increase and decrease the
assets that are available to the business.
 Related to the Long-Term Asset accounts.
Investing Activities
Inflows
 Selling long-term
productive assets.
 Selling equity
investments.
 Collecting of
principal on loans.
 Other.
Outflows
 Purchase long-term
productive assets.
 Purchase equity
investments.
 Purchase debt
investments.
 Make loans.
Focus your attention on changes in:
plant assets, long-term investments,
other long-term assets
Financing Activities
 Transactions involving obtaining resources
from the owners or returning resources to
them.
 Also involves obtaining resources from
creditors and repaying the amount borrowed.
Financing Activities
Inflows


Issuing stock.
Issuing bonds and
notes.
Outflows



Cash dividends or
withdrawals by owner.
Purchase treasury
stock.
Repay cash loans.
Focus your attention on changes in:
long-term debt and stockholder’s equity
Noncash Investing and Financing
Investing and financing activities that affect the
company’s financial position, but not the entity’s
cash flow during the period.
Items requiring separate disclosure include:
 Retirement of debt by issuing equity securities.
 Conversion of preferred stock to common stock.
 Acquiring land by issuing a note payable.
Format of the Statement
of Cash Flows
 FASB Statement 95 approved two methods
for reporting cash flows from operating
activities.
1 Indirect method
2 Direct method
Format of Statement
Company Name
Statement of Cash Flows
For the Period Ended XXXX
Cash flows from operating activities:
[List]
Net cash provided (used) by operating activites
Cash flows from investing activities:
[List]
Net cash provided (used) by investing activites
Cash flows from financing activities:
[List]
Net cash provided (used) by financing activites
Net increase (decrease) in cash
Cash (and equivalents) balance at beginning of period
Cash (and equivalents) balance at end of period
$ #####
#####
#####
$ #####
#####
$ #####
Direct Method of Determining Cash
Flows from Operating Activities
 Examine each income statement item with
the objective of reporting how much cash was
received or disbursed in association with the
item.
 Start with Sales or Revenues Earned and
work your way down through the income
statement.
Think about it
Cash collected from customers = $24,440
or
Sales – increase in accounts receivable
$24,623 - 183 = $24,440
If accounts receivable is
increasing, then our
customers are charging
more and paying less.
Think about it.
Cash Paid for Inventory, $18,516
or
Cost of goods sold + increase in inventory increase in accounts payable
18,048 + 651 – 183 = $18,516
If inventory
increases, you’re
going to have to
pay cash for it.
If accounts
payable
increases, you
are charging
more, paying less
Think about it:
Cash paid for operating expenses = $4,793
Or
Operating expenses – increase in accrued
liabilities
$4,883 – 90 = $4,793
Acquisitions of property and equipment:
Property & Equipment
Beg bal 3,428
269 Depreciation
3,159
1,186
End bal 4,345
Borrowing:
Long-term liabilities
Beg bal 464
14
End bal
478
Proceeds from issuance of common stock:
Common stock
Beg bal 446
230
End bal
676
Payment of cash dividends:
Retained earnings
Beg bal 3,788
Net inc.
886
4,674
End bal
4,531
143
Indirect Method of Determining Cash
Flows from Operating Activities
Begin with net income as reported on the
income statement and adjust:



Add any noncash expenses or any losses
Deduct any noncash gains or revenues
Adjust for changes in current operating assets
and liabilities
Indirect Method of Reporting
Operating Cash Flows
Changes in current assets
and current liabilities.
Cash Flows
from Operating
Activities
Net
Income
+ Losses and
- Gains
+ Noncash
expenses such as
depreciation and
amortization.
Indirect Method of Reporting
Operating Cash Flows
Cash + Other Assets = Liabilities + Capital
Cash flows provided by operating activities:
Cash flows from investing activities:
Cash paid to acquire plant assets
$(101,000)
Cash received from sale of land
24,000
Net cash flows used by investing activities
Cash flows from financing activities:
Cash received from stock issuance
$30,000
Cash paid on long-term note
(15,000)
Cash paid for dividends
(11,000)
Net cash flows provided by financing activities
Net increase (decrease) in cash
Cash balance, beginning of year
Cash balance, end of year
$80,000
(77,000)
4,000
$7,000
20,000
$27,000