Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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Managerial Accounting
Second Edition
Weygandt / Kieso / Kimmel
The Statement of Cash Flows
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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$ $
$ $
$ $$
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$
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$
$
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$
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$ $
$
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Purpose of
Statement
Primary Purpose of Statement
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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To provide information about:
– cash receipts
– cash payments
– the net change in cash
resulting from:
• operating,
• investing
• financing activities of a
company during a period.
Questions the Statement of Cash Flows Answers
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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Meaning of Cash Flows
• Cash equivalents are:
– readily convertible to known
amounts of cash
– so near maturity that their
market value is relatively
insensitive to changes in
interest rates.
• treasury bills
• commercial paper
• money market funds
• The term cash includes cash
equivalents.
Operating Activities...
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Include:
– The cash effects of transactions
that create revenues and expenses
and
– Enter into determination of net
income.
Use of Statement
of Cash Flows
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Involve Income Statement
Items
Investing Activities...
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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Include:
– Acquiring and disposing of
investments and productive longlived assets.
– Lending money and collecting the
loans.
Involve Investments and
Long-Term Asset Items
Financing Activities...
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Include:
– Obtaining cash from issuing debt
and repaying the amounts
borrowed
– Obtaining cash from stockholders
and paying them dividends.
Use of Statement
of Cash Flows
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Involve Long-Term Liability
and Stockholders’ Equity
Items
Types of Cash Flows Operating Activities
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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Illustration 12-1
• Cash inflows:
– From sale of goods or services
– From return on loans (interest
received) and on equity
securities (dividends received)
• Cash outflows:
– To suppliers for inventory
– To employees for services
– To government for taxes
– To lenders for interest
– To others for expenses
Types of Cash Flows Investing Activities
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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Illustration 12-1
• Cash inflows:
– From sale of property, plant, and
equipment
– From sale of debt or equity
securities of other entities
– From collection of principal on
loans to other entities
• Cash outflows:
– To purchase property, plant, and
equipment
– To purchase debt or equity
securities of other entities
– To make loans to other entities
Illustration 12-1
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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Types of Cash Flows Financing Activities
• Cash inflows:
– From sale of equity securities
(company's own stock)
– From issuance of debt (bonds
and notes)
• Cash outflows:
– To stockholders as dividends
– To redeem long-term debt or
reacquire capital stock
Operating Activities
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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ALERT
Some cash flows relating to investing
or financing activities are classified
as operating activities. For example...
– Receipts of investment revenue
(interest and dividends) and
– Payments of interest to lenders are
classified as operating activities
because these items are reported in
the income statement.
Significant Noncash Activities...
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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• That do not affect cash are NOT
reported in the body of the
statement of cash flows.
• Are reported:
– In a separate schedule at the
bottom of the statement of cash
flows or
– In a separate note or
supplementary schedule to the
financial statements.
Significant Noncash Activities...
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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1. Issuance of common stock to
purchase assets.
2. Conversion of bonds into common
stock.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets.
Format for Statement of Cash Flows
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Three activities:
– operating
Product Life
Cycle
– investing
Statement of
Cash Flows –
Indirect Method
Direct Method
– financing
Use of Statement
of Cash Flows
Body of
Statement
PLUS
– noncash investing and
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financing activities
Product Life Cycle
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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• A series of phases all products go
through
• The phases are often referred to as:
– introductory phase
– growth phase
– maturity phase
– decline phase.
• The phase a company is in affects its
cash flows.
Introductory Phase...
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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To support asset purchases the
company may issue stock or
debt. Expect:
cash from operations to be
negative
cash from investing
to be negative.
cash from financing
to be positive.
Growth Phase
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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The company is striving to
expand its production and
sales.
Expect:
small amounts of cash to be
generated from operations.
cash from investing to be
negative.
cash from financing to be
positive
Maturity Phase
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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Sales and production leveloff
Expect:
cash from operations to
exceed investing needs
cash from investing
to be neutral
cash from financing
to be negative
Decline Phase
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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Sales and production decline
Expect:
cash from operations to decline
cash from investing to
possibly become
positive
cash from financing
to possibly become
negative
Illustration 12-3
Impact of Product Life Cycle on Cash Flows
0
Why Report Causes of Changes in Cash?
Because investors, creditors, and
other interested parties want to know
what is happening to a company’s
most liquid asset,
CASH
Statement of Cash Flows Helps Users Evaluate
Purpose of
Statement
1. The
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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company’s ability to
generate future cash flows.
2. The company’s ability to pay
dividends and meet obligations.
3. The reasons for the difference
between net income and net
cash provided (used) by
operating activities.
4. The investing and financing
transactions during the period.
Statement of Cash Flows Helps Answer the
Following Questions
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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• How did cash increase when there
was a net loss for the period?
• How were the proceeds of the bond
issue used?
• How was the expansion in the plant
and equipment financed?
• Why were dividends not increased?
• How was the retirement of debt
accomplished?
• How much money was borrowed
during the year?
• Is cash flow greater or less than net
income?
Free Cash Flow
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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Cash Provided By
Operations
– Capital Expenditures
– Dividends Paid
Free Cash Flow
Capital Expenditure Ratio
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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An indicator of a company's ability
to generate sufficient cash to finance
new fixed assets.
Capital expenditures are
purchases of fixed
assets.
•Purpose of
Capital Expenditure Ratio
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Use of Statement
of Cash Flows
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Cash Provided by Operations
Capital Expenditures
Assessing Liquidity, Solvency, and
Profitability Using Cash Flows
Purpose of
Statement
Operating,
Investing, and
Financing
Activities
Product Life
Cycle
Statement of
Cash Flows –
Indirect Method
Direct Method
Rather than using numbers from the
income statement for assessment
purposes, we use numbers from the
statement of cash flows.
Use of Statement
of Cash Flows
The ratios are cash-based
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instead of accural-based.
COPYRIGHT
Purpose of
Statement
Operating,
Investing, and
Copyright © 2002, John Wiley & Sons, Inc. All rights reserved.
Financing
Activities
Reproduction or translation of this work beyond that permitted in
Product
Life
Section
Cycle
117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Statement of
for further information should be addressed to the
CashRequest
Flows –
Indirect
Method
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Department, John Wiley & Sons, Inc. The purchaser
Direct Method
may make back-up copies for his/her own use only and not for
Use of Statement
distribution
or resale. The Publisher assumes no responsibility
of Cash
Flows
for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
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