Statement of Cash FlowsStatement of Cash Flows
Chapter 13
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin Slide 2
The statement of cash flowsreports the entity’s cash flows
(cash receipts and cash payments)for the period.
Basic Concept
McGraw-Hill/Irwin Slide 3
Timing of the Financial Statements
December 31, 20x1(a point in time)
BalanceSheet
December 31, 20x2(a point in time)
BalanceSheet
For the Year Ended December 31, 20x2(a period of time)
IncomeStatement
Statement ofCash Flows
Statement ofStockholders’
Equity
McGraw-Hill/Irwin Slide 4
Understanding the BusinessPositive cash flows permit a company to . . .
Expand its operations
.
Expand its operations
.
Replace needed assets.
Replace needed assets.
Take advantage of market
opportunities.
Take advantage of market
opportunities.
Pay dividends to
owners.
Pay dividends to
owners.
Wall Street analysts consider cash flow an important indicator of a company’s
financial health.
Wall Street analysts consider cash flow an important indicator of a company’s
financial health.
Relationships to the Balance Sheet and the Income Statement
Information needed to prepare a statement of cash flows:
Comparative Balance Sheets.Income Statement.Additional details concerning
selected accounts.
Information needed to prepare a statement of cash flows:
Comparative Balance Sheets.Income Statement.Additional details concerning
selected accounts.
McGraw-Hill/Irwin Slide 6
Relationships to the Balance Sheet and the Income Statement
Cash = Liabilities Stockholders’ Equity Noncash Assets
Cash = Liabilities Stockholders’ Equity Noncash Assets
Derives from . . .
Assets = Liabilities Stockholders’ Equity
Assets = Liabilities Stockholders’ Equity
McGraw-Hill/Irwin Slide 7
Classifications of the Statement of Cash Flows
Operating Activities
Cash inflows and outflows directly related to earnings
from normal operations.
Investing Activities
Cash inflows and outflows related to the acquisition or sale of productive
facilities and investments in the securities of other companies.
Financing Activities
Cash inflows and outflows related to external sources of financing (owners and creditors) for the
enterprise.
McGraw-Hill/Irwin Slide 8
Direct Method vs. Indirect Method
Two Formats for Reporting Operating Activities
Reports the cash effects of each operating
activity
Direct Method
Starts with accrual net income and converts to cash basis
Indirect Method
Note that no matter which format is used, the same amount of net cash flows from operating activities is generated.
McGraw-Hill/Irwin Slide 9
Reporting Cash Flows from Operating Activities-Indirect Method
Net Income
Net Income
Cash Flows from Operating
Activities - Indirect Method
Cash Flows from Operating
Activities - Indirect Method
+/- Changes in current assets and current
liabilities.
+/- Changes in current assets and current
liabilities.
+ Losses and - Gains
+ Losses and - Gains
+ Noncash expenses such as depreciation and
amortization.
+ Noncash expenses such as depreciation and
amortization.
The indirect method adjusts net income by eliminating noncash items.
The indirect method adjusts net income by eliminating noncash items.
McGraw-Hill/Irwin Slide 10
April 30, April 30,
Dollars in Thousands 2009 2008 Changes
ASSETSCurrent assets:
Cash & cash equivalents 84,140$ 51,497$ 32,643 Short-term investments - 3,000 (3,000) Accounts Receivable 53,735 49,186 4,549 Inventories 39,612 38,754 858 Prepaid expenses 5,552 12,009 (6,457)
Total current assets 183,039 154,446 Equipment, net 79,381 81,781 (2,400) Total assets 262,420$ 236,227$
LIABILITIES & STOCKHOLDERS' EQUITYCurrent liabilities:
Accounts payable 48,005$ 49,803$ (1,798)Accrued expenses 44,403 41,799 2,604
Total current liabilities 92,408 91,602 Stockholders' Equity:
Contributed capital 9,803 9,158 645Retained earnings 160,209 135,467 24,742
Total stockholders' equity 170,012 144,625Total liabs & stockholders' equity 262,420$ 236,227$
NATIONAL BEVERAGE GORP.Consolidated Balance Sheet
The Statement of Cash Flows will begin with net income from the Income
Statement.
The Statement of Cash Flows will begin with net income from the Income
Statement.
Cash flows from operating activities: Net income 24,742$ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,891 Changes in assets and liabilities: Accounts receivable
Inventory Prepaid expense Accounts payable Accrued expenses
Net cash provided by operating activities
Consolidated Statement of Cash FlowsNATIONAL BEVERAGE CORP.
Year Ended April 30, 2009
Step 1Adjust net income for depreciation and
amortization expense.
Step 1Adjust net income for depreciation and
amortization expense.
Cash flows from operating activities: Net income 24,742$ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,891 Changes in assets and liabilities: Accounts receivable (4,549)
Inventory (858)Prepaid expense 6,457Accounts payable (1,798)Accrued expenses 2,604
Net cash provided by operating activities 35,489Cash flows for investing activities: Purchases of property, plant and equipment (6,658)
167 Purchase of short-term investments (109,450) Proceeds from short-term investments 112,450 Net cash used by investing activities (3,491) Cash flows from financing activities: Purchase of treasury stock (305) Proceeds from issuance of stock 950 Net cash used in financing activities 645 Net increase (decrease) in cash & cash equivalents 32,643 Cash & cash equivalents at beginning of period 51,497 Cash & cash equivalents at end of period 84,140$
Consolidated Statement of Cash FlowsNATIONAL BEVERAGE CORP.
Proceeds from disposal of property, plant & equipment
Year Ended April 30, 2009
Step 2Adjust net income for changes in
current assets and current liabilities.
Step 2Adjust net income for changes in
current assets and current liabilities.
McGraw-Hill/Irwin Slide 14
Use this table when adjusting Net Income Use this table when adjusting Net Income to Operating Cash Flows using the to Operating Cash Flows using the
indirect methodindirect method..
Reporting Cash Flows from Operating Activities—Indirect Method
McGraw-Hill/Irwin Slide 15
Adjustment for Gains and Losses
GainsGains must be subtracted from net
income to avoid double counting the gain.
Losses Losses must be added to net income to avoid double counting the loss.
Transactions that cause gains and losses should be classified on the cash flow statement as operating, investing, or financing activities, depending on their dominate characteristics. For example, if the sale of
equipment produced a gain, it would be classified as an investing activity.
McGraw-Hill/Irwin Slide 16
Quality of Income Ratio
In general, this ratio measures the portion of income that was generated in cash. All other things equal, a higher quality of income ratio indicates greater ability to finance operating
and other cash needs from operating cash inflows.
Cash Flow from Operating ActivitiesNet Income
Quality of Income Ratio
=
McGraw-Hill/Irwin Slide 17
Cash Flows from
Investing Activities
Cash Flows from
Investing Activities
+
Cash Flows from Investing Activities
Inflows Cash received from:Sale or disposal of property,
plant and equipmentSale or maturity of investments
in securities
Inflows Cash received from:Sale or disposal of property,
plant and equipmentSale or maturity of investments
in securities
_
Outflows Cash paid for: Purchase of property, plant and
equipment Purchase of investments in
securities
Outflows Cash paid for: Purchase of property, plant and
equipment Purchase of investments in
securities
McGraw-Hill/Irwin Slide 18
In general, this ratio reflects the portion of purchases of property, plant and equipment financed from operating
activities. A high ratio indicates less need for outside financing for current
and future expansions.
Capital Acquisitions Ratio
Cash Flow from Operating ActivitiesCash Paid for Property, Plant,
and Equipment
Capital Acquisitions
Ratio=
McGraw-Hill/Irwin Slide 19
Cash Flows from
Financing Activities
Cash Flows from
Financing Activities
+
_
Cash Flows from Financing ActivitiesInflows
Cash received from:Borrowings on notes,
mortgages, bonds, etc. from creditors
Issuing stock to owners
Inflows Cash received from:Borrowings on notes,
mortgages, bonds, etc. from creditors
Issuing stock to owners
Outflows Cash paid for: Repayment of principal to
creditors (excluding interest, which is an operating activity)
Repurchasing stock from owners
Dividends to owners
Outflows Cash paid for: Repayment of principal to
creditors (excluding interest, which is an operating activity)
Repurchasing stock from owners
Dividends to owners
McGraw-Hill/Irwin Slide 20
Required Supplemental Information
1. Reconciliation of net income to cash flow from operations (for direct method).
2. Cash paid for income taxes and interest.
3. Significant noncash investing and financing activities.
Required Supplemental Information
1. Reconciliation of net income to cash flow from operations (for direct method).
2. Cash paid for income taxes and interest.
3. Significant noncash investing and financing activities.
Additional Cash Flow Disclosures
Example: Purchase of a building with a mortgage.
McGraw-Hill/Irwin Slide 21
In general, this measures a firm’s ability to pursue long-term investment opportunities.
Free Cash Flow
Free Cash Flow = Cash Flow from Operating Free Cash Flow = Cash Flow from Operating Activities – Dividends – Capital ExpendituresActivities – Dividends – Capital Expenditures