Cash Flow Statement

CASH FLOW STATEMENT  Statement of Cash Flow  Cash Flow Classifications  Operating  Investing  Financing Cash Flow Example (Lowe’s and Southwest Airlines) STATEMENT OF CASH FLOW ( FAS 95, 1985) Purpose: The Cash Flow Statement shows:  where cash comes from  where cash is going  the change in cash during the period Three parts:  Operating activities  Investing activities  Financing activities Cash Flow Statement 1 OPERATING ACTIVITIES Cash effects of transactions that determine net income. Hint: Relate to income statement accounts. Sources:  Cash Sales  Collection of accounts receivable Uses: payments to:  Suppliers  Employees  Government for tax Lenders for interestCash Flow from Operations Methods of Presentation ( FAS 95, 1985) Cash Flow Statement 2 GAAP allows two methods of presentation for Cash Flow from Operations  Direct method  Indirect method  Reality Check - SFAS 95 states a preference for the direct method; however, 98.8% of major corporations use the indirect method. Cash Flow from Operations Methods of Presentation DIRECT METHOD Procedure: Restate income statement on the cash basis Format: Cash from Sales Cash Paid to Suppliers Cash Paid to Employees Cash Paid in Interest Cash Paid in Taxes Cash Flow from Operations $1,000,000 -700,000 -100,000 -50,000 -60,000 $90,000 INDIRECT METHOD Cash Flow Statement 3 Procedure: Begin with net income and adjust for all non-cash revenues and expenses. Format: Net Income Depreciation Increase in Accounts Receivable* Decrease in Inventory* Increase in Accounts Payable* Decrease in Taxes Payable* Cash Flow from Operations * see next page for interpretation $70,000 +65,000 -55,000 +10,000 +20,000 -20,000 $90,000 INTERPRETATION OF CHANGES IN CURRENT ACCOUNTS IN AN INDIRECT CASH FLOW STATEMENT Change in Current Account Increase in Accounts Receivable Decrease in Accounts Receivable Increase in Inventory Decrease in Inventory Increase in Accounts Payable Decrease in Implied Effect on Ca s h Decrease Interpretation Sales were included in income this year; however, the cash will not be received until next year. Cash was collected this year for sales that occurred in previous years. Inventory was purchased this year, but will not become cost of goods sold until next year. Previously purchased inventory was included in cost of goods sold this year. Income was decreased by an expense that will be paid next year. An expense from the previous year Increase Decrease Increase Increase Decrease Cash Flow Statement 4 Accounts Payable Increase in Taxes Payable Decrease in Taxes Payable was paid this year. Increase An expense that decreased income this year will not be paid until next year. Expense that decreased income last year, but paid this year Decrease INVESTING ACTIVITIES Include making and collecting loans (to others), acquiring and disposing of equity instruments (of others) and of property, plant, and equipment. Sources:  sale of PP&E*  sale of investments in other companies  collections of loans to others Uses:  purchase PP&E (capital expenditures)*  purchase investments in other companies Cash Flow Statement 5  loans to others * most common FINANCING ACTIVITIES Liability and owner's equity transactions such as (1) obtaining capital from owners and paying owners with dividends, and (2) borrowing money from creditors and repaying principle of loans. Hint: must involve transactions with corporations own debt or equity. Sources:  issue of capital stock  borrowing (issue bonds or notes, bank loan)  sale of treasury stock Uses:  dividends to stockholders  payment of debt Cash Flow Statement 6  retirement of capital stock  purchase treasury stock STATEMENT OF CASH FLOWS FORMAT Company Name Statement of Cash Flows For the Period Ending _____ I. Cash Flows from Operating Activities: Indirect Net Income Adjustments to Net Income II. Cash Flows from Investing Activities: Sources and Uses are shown (no particular order required) III. Cash Flows from Financing Activities: Sources and Uses are shown (no particular order required) IV. V. Effect of Exchange Rate Changes on Cash1 Cash Balance Net increase or decrease in the cash + Beginning cash balance Ending cash balance Direct Cash Revenues Cash Expenses PLUS EQUALS VI. VII. Significant Non Cash Transactions* Cash Amounts Paid for Interest and Taxes (If not disclosed above)* Cash Flow Statement 7 * May be shown on face of CFS or in notes Lowe's Companies, Inc. Consolidated Statements of Cash Flows (In millions) Fiscal years ended on Cash flows from operating activities: Net earnings Adjustments to reconcile operating activities: Depreciation and amortization Other Changes in operating assets and liabilities: Merchandise inventory - net Other operating assets Accounts payable Other operating liabilities Net cash provided by operating activities February 1, 2008 $2,809 1,464 152 (464) (64) 185 265 4,347 February 2, February 3, 2007 2006 $3,105 1,237 79 (509) (135) 692 33 4,502 (284) 572 (558) 415 (3,916) 56 (3,715) 23 989 (33) 176 (276) (1,737) 12 (846) (59) 423 $364 $179 $2,031 $2,765 1,051 70 (785) (38) 137 642 3,842 (1,829) 1,802 (354) 55 (3,379) 31 (3,674) 1,013 (633) 290 (171) (774) (275) (107) 530 $423 $173 $1,593 Cash flows from investing activities: Purchases of short-term investments (920) Proceeds from maturity of short-term investments 1,183 Purchases of long-term investments (1,588) Proceeds from maturity of long-term investments 1,162 Fixed assets acquired (4,010) Other 50 Net cash used in investing activities (4,123) Cash flows from financing activities: Net increase in short-term borrowings Proceeds from issuance of long-term debt Repayment of long-term debt Proceeds from issuance under employee plans Cash dividend payments Repurchase of common stock Excess tax benefits of share-based payments Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental disclosures of cash flow information: Cash paid for interest, net of amount capitalized Cash paid for income taxes 1,041 1,296 (96) 149 (428) (2,275) 6 (307) (83) 364 $281 $198 $1,725 Cash Flow Statement 8 Noncash investing and financing activities: Noncash fixed asset acquisitions, Conversions of long-term debt to equity $13 $82 $99 $565 $159 $175 Test Your Cash Flow Statement Knowledge 1. Did Lowe’s inventory increase or decrease during 2008? 2. Did the amount of long-term debt on the balance sheet of Lowe’s increase or decrease during 2006 to 2008? 3. What was the ending cash balance of Lowe’s in 2005? $ _____________________ 4. What was the most likely use of the proceeds from maturities of investments during 2008? 5. What was the most likely use(s) of funds generated from operations during 2008? 6. What was the most likely use of proceeds from borrowing during 2008? SOUTHWEST AIRLINES CO. CONSOLIDATED STATEMENT OF CASH FLOWS Cash Flow Statement 9 YEARS ENDED DECEMBER 31, (In thousands) 1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 474,378 $ 433,431 $ 317,772 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 248,660 225,212 195,568 Deferred income taxes 142,940 108,335 81,711 Amortization of deferred gains (15,172) (15,251) (15,414) Amortization of scheduled inspections & repairs 28,949 22,763 20,540 Changes in certain assets and liabilities: Accounts receivable 15,421 (12,269) (3,090) Other current assets (31,698) 1,589 6,243 Accounts payable and accrued liabilities 64,335 53,194 8,751 Air traffic liability 56,864 46,737 (4,757) Other current liabilities 156 19,293 (4,204) Other 16,877 3,101 7,468 Net cash provided by operating activities 1,001,710 886,135 610,588 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (1,167,834) Net cash used in investing activities (1,167,834) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of long-term debt Payment of long-term debt Payment of cash dividends Proceeds from Employee stock plans Repurchase of common stock Net cash provided by (used in) financing NET CHANGE IN CASH CASH AT BEGINNING OF PERIOD CASH AT END OF PERIOD CASH PAYMENTS FOR: Interest, net of amount capitalized Income taxes (947,096) (947,096) (688,927) (688,927) 255,600 (12,107) (10,842) 64,288 (90,507) 206,432 -(118,859) (9,284) 44,272 (100,000) (183,871) (244,832) 623,343 $ 378,511 98,764 (12,665) (6,593) 40,335 0 119,841 41,502 581,841 $ 623,343 40,308 378,511 $ 418,819 $ 26,604 $ 131,968 $ 33,384 $ 147,447 $ 42,372 $ 107,066 SAMPLE EXAMINATION 1. Why is net income much smaller than cash flow from operations in 1999? Cash Flow Statement 10 The difference results primarily from depreciation, which was subtracted to find net income, but did not require a cash expenditure. The difference was also from performing operations in 1999 that will require tax payments in later years. 2. Did long-term liabilities increase or decrease on the balance sheet in 1999? In1998? During 1999, SWA issued $255,600 in debt and paid off $12,107. Therefore, debt in 1999 increased. During 1998, SWA did not borrow and they paid off $118,859; long-term debt decreased during 1998. 3. How was property and equipment paid for during 1999? SWA paid for PP&E primarily from cash received from operations. They also had to borrow a small amount. Cash Flow Statement 11