Ch.12 Statement of Cash Flows

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					                          Ch.12
                       Statement of
                       Cash Flows


                        Prof. J. Wang



Chapter 12, Slide #1
  • How to read statement of cash flows
  • How to prepare statement of cash flows




Chapter 12, Slide #2
                          Part I
                  How to read statement
                     of cash flows?




Chapter 12, Slide #3
  • How much cash did the company generate
    from its operations?
  • Was the cash generated from its operations
    enough to pay for capital expenditures?
  • Was the cash from operations, after paying
    for net capital expenditures, adequate to pay
    its shareholders’ dividends?

Chapter 12, Slide #4
                       Free cash flows
  • The amount of cash that remain after
    deduction net capital expenditure and
    dividends from cash from operations.
  • If free cash flows are positive, it means that
    the company has met all its planned cash
    commitments and has cash available for
    expansion or reducing debt.

Chapter 12, Slide #5
                           Part II
                       How to prepare
                        statement of
                         cash flows




Chapter 12, Slide #6
Statement of Cash Flows Format
Cash flows from operating activities:
   Inflows                                                $ xxx
   Outflows                                                (xxx)
Net cash provided (used) by operating activities                   $xxx
Cash flows from investing activities:
   Inflows                                                $ xxx
   Outflows                                                (xxx)
Net cash provided (used) by investing activities                   xxx
Cash flows from financing activities:
   Inflows                                                $ xxx
   Outflows                                                (xxx)
Net cash provided (used) by financing activities                    xxx
Net increase (decrease) in cash and cash equivalents               $xxx
Cash and cash equivalents at beginning of year                      xxx
Cash and cash equivalents at end of year                           $xxx
                                    from balance sheets
Chapter 12, Slide #7
       1. Classification of cash flows
  • Operating activities
  • Investing activities
  • Financing activities




Chapter 12, Slide #8
                         Operating Activities
                                       Payment to suppliers
                         Cash             for inventory
   Collection of    transactions
customer accounts concerned with
                   acquiring and
                 selling products
                    and services
                       (income
                     statement
                      activities) Payment of wages
  Payment of taxes
  Chapter 12, Slide #9
                          Investing Activities
                                                     Capital
                             Cash transactions     expenditures
                              concerned with
                               acquiring and
                             disposing of long-
    Sale of
                                term assets
property, plant,
and equipment
                                        Purchase/sale of
                                       another company
  Chapter 12, Slide #10
                                                                                Financing Activities
Issuance/repurchase      Cash      Issuance/repayment
      of stock        transactions     of bank note
                    concerned with
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                      funds in the
                     form of debt
Issuance/retirement    and equity
                                                                                                  Payment of
                                of bonds
                                                                                                   dividends
  Chapter 12, Slide #11
  Categorizing Cash Flow Activities
                  Operating Activities   Current
                                           assets
                                            and
                                          current
Investing Activities                     liabilities

                                                Long-term
                                                 liabilities
    Long-term                   Financing            or
      assets                    Activities     stockholders’
                                                   equity
  Chapter 12, Slide #12
 2. Methods to Report Cash from
       Operating Activities
  Direct Method                       The amount of
         • Reports major classes      cash provided by
           of gross cash receipts        operating
           and cash payments           activities is the
                                      same under both
  Indirect Method                        methods
         • Adjusts net income to
           remove the effect of all
           accruals and deferrals
Chapter 12, Slide #13
                                                       LO4
Statement of Cash Flows Format
Cash flows from operating activities:
   Inflows                                             $ xxx
   Outflows                                             (xxx)
Net cash provided (used) by operating activities                $xxx
Cash flows from investing activities:
   Inflows                                             $ xxx
   Outflows                                             (xxx)
Net cash provided (used) by investing activities                xxx
Cash flows from Only section of statement
                  financing activities:
   Inflows      that differs in form between           $ xxx
   Outflows      direct and indirect method             (xxx)
Net cash provided (used) by financing activities                 xxx
                  (net cash flow total is the
Net increase (decrease) in cash and cash equivalents            $xxx
                              same)
Cash and cash equivalents at beginning of year                   xxx
Cash and cash equivalents at end of year                        $xxx

Chapter 12, Slide #14
                             Direct method
  Cash flows from operations:
        Cash collected from operations                   xxx
        Less: cash paid for operations
                    Purchase of inventory       xxx
                    Salaries                    xxx
                    Income taxes                xxx
                    Interest expense            xxx      xxx
        Net cash provided/used by operations             xxx

        Start with the income statement and adjust for changes in current
           assets and liabilities
        For example, to compute cash collected from sales:
           Sales + beginning A/R – ending A/R
        Or
           Sales +/- decrease/increase in A/R


Chapter 12, Slide #15
                          Indirect method
  Cash flows from operations:
        Net income                              xxx
        Adjustments to convert net income to cash flows
         from operating activities:
                    Add: non-cash expenses/losses             xxx
                    Less: non-cash gains                      xxx
                    +/- decrease/increase in current assets   xxx
                    +/- increase/decrease in current liab.    xxx   xxx
        Net cash provided/used by operations                        xxx

Chapter 12, Slide #16
   Cash flows from investing activities

  • Examining the change in long-term assets
  • Examine additional transaction information




Chapter 12, Slide #17
   Cash flows from financing activities

  • Examining the change in long-term
    liabilities and shareholders’ equity
  • Examine additional transaction information




Chapter 12, Slide #18