Chapter 12
Statement of Cash Flows
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
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.
Financing
Cash received and paid
for exchanges with
lenders and stockholders.
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Business Activities and Cash Flows
Checking and
Savings
Accounts
Cash
Currency
Cash Equivalents
Highly liquid short-term investments
within three months of maturity.
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Classifying Cash Flows
UNDER ARMOUR, INC.
Statement of Cash Flows
For the Year Ended December 31, 2010
(in millions)
Net cash provided (used) by operating activities
$
37
Net cash provided (used) by investing activities
(41)
Net cash provided (used) by financing activities
7
Net Change in Cash and Cash Equivalents
3
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
187
$ 190
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Operating Activities
Cash inflows and outflows that directly relate
to revenues and expenses reported on the
Income Statement.
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Investing Activities
Under Armour’s 2010 Investing Activities
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Financing Activities
Under Armour’s 2010 Financing Activities
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Relationships Between Classified Balance
Sheet and Statement of Cash Flow (SCF)
Categories
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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.
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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.
+ Losses and Gains
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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.
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Evaluating Operating 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.
• Look at the relationship
between operating cash
flows and Net Income.
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Evaluating Investing Cash Flows
• Healthy companies tend to
show negative cash flows
in the investing activities
section.
• Be cautious over a positive
total cash flow in the
investing activities section
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Evaluating Financing Cash Flows
• It’s not possible to evaluate
the company’s financing
cash flows by simply
determining whether they
are positive or negative on
an overall basis.
• Instead, consider detailed
line items with this section
to assess the company’s
overall financing strategy.
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Overall Patterns of Cash Flows
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Reporting Operating Cash Flows with
the Direct Method
Provides more
detailed information
Identifies cash
inflows and outflows
relationships
Prepared by
adjusting accrual
basis to cash basis
Investing and
financing sections
for the two methods
are identical
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Reporting Sales of Property, Plant, and
Equipment (PPE) (Indirect)
Depreciation
Expense
Loss on Sale
of PPE
Gain on Sale
of PPE
A loss on the sale of PPE is added back
to Net Income just as Depreciation
Expense is added back. Adding these
noncash items restores Net Income to
what it would have been had
Depreciation and the loss not been
subtracted at all.
Just the opposite is true for a gain on
the sale of PPE. Subtracting the gain
reverses the effect of the gain having
been added to Net Income.
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T-account Approach (Indirect Method)
Instead of creating schedules for
each section of the Statement of
Cash Flows, some prefer to
prepare a single large T-account
to represent the changes that
have taken place in Cash
subdivided into the three
sections of the Statement of
Cash Flows.
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T-account Approach(Indirect Method)
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End of Chapter 12
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