Statement of Cash Flows

Transcription

1 C H A P T E R 14 Statement f Cash Flws Crprate Financial Accunting 13e Warren Reeve Duchac human/istck/360/getty Images

2 Reprting Cash Flws (slide 1 f 3) The statement f cash flws reprts a cmpany s cash inflws and utflws fr a perid. The statement f cash flws prvides useful infrmatin abut a cmpany s ability t: Generate cash frm peratins Maintain and expand its perating capacity Meet its financial bligatins Pay dividends The statement f cash flws is used by managers in evaluating past peratins and in planning future investing and financing activities.

3 Reprting Cash Flws (slide 2 f 3) It is als used by external users such as investrs and creditrs t assess a cmpany s prfit ptential and ability t pay its debt and pay dividends. The statement f cash flws reprts activities, as fllws: 1. Cash flws frm perating activities are the cash flws frm transactins that affect the net incme f a cmpany. 2. Cash flws frm investing activities are the cash flws frm transactins that affect investments in the nncurrent assets f the cmpany. 3. Cash flws frm financing activities are the cash flws frm transactins that affect the debt and equity f the cmpany.

4 Reprting Cash Flws (slide 3 f 3) The cash flws are reprted in the statement f cash flws as fllws: The ending cash n the statement f cash flws equals the cash reprted n the cmpany s balance sheet at the end f the year.

5 Surces and Uses f Cash

6 Cash Flws frm Operating Activities Cash flws frm perating activities reprts the cash inflws and utflws frm a cmpany s day-t-day peratins. Cmpanies may select ne f tw alternative methds fr reprting cash flws frm perating activities in the statement f cash flws: The direct methd The indirect methd Bth methds result in the same amunt f cash flw frm perating activities. They differ in the way they reprt cash flws frm perating activities.

7 Cash Flws frm Operating Activities: The Direct Methd The direct methd reprts perating cash inflws (receipts) and cash utflws (payments) as fllws: The primary perating cash inflw is cash received frm custmers. The primary perating cash utflws are cash payments fr merchandise, perating expenses, interest, and incme tax payments. The cash received frm perating activities less the cash payments fr perating activities is the net cash flw frm perating activities.

8 Cash Flws frm Operating Activities: The Indirect Methd The indirect methd reprts cash flws frm perating activities by beginning with net incme and adjusting it fr revenues and expenses that d nt invlve the receipt f cash r payment f cash, as fllws: The adjustments t recncile net incme t net cash flw frm perating activities include such items as depreciatin and gains r lsses n fixed assets. Changes in current perating assets and liabilities such as accunts receivable r accunts payable are als added r deducted, depending n their effect n cash flws.

9 Cash Flws frm Investing Activities Cash flws frm investing activities shw the cash inflws and utflws related t changes in a cmpany s lng-term assets. Cash flws frm investing activities are reprted n the statement f cash flws as fllws: Cash inflws frm investing activities nrmally arise frm selling fixed assets, investments, and intangible assets. Cash utflws nrmally include payments t purchase fixed assets, investments, and intangible assets.

10 Cash Flws frm Financing Activities Cash flws frm financing activities shw the cash inflws and utflws related t changes in a cmpany s lng-term liabilities and stckhlders equity. Cash flws frm financing activities are reprted n the statement f cash flws as fllws: Cash inflws frm financing activities nrmally arise frm issuing lng-term debt r equity securities. Fr example, issuing bnds, ntes payable, preferred stck, and cmmn stck creates cash inflws frm financing activities. Cash utflws frm financing activities nrmally include paying cash dividends, repaying lng-term debt, and acquiring treasury stck.

11 Nncash Investing and Financing Activities A cmpany may enter int transactins invlving investing and financing activities that d nt directly affect cash. Fr example, a cmpany may issue cmmn stck t retire lng-term debt. Because such transactins indirectly affect cash flws, they are reprted in a separate sectin that usually appears at the bttm f the statement f cash flws.

12 N Cash Flw Per Share Cash flw per share is cmputed as fllws: Cash Flw per Share = Cash Flw frm Operatins Number f Cmmn Shares Outstanding Cash flw per share shuld nt be reprted n a cmpany s financial statements fr the fllwing reasns: Users may misinterpret cash flw per share as the per-share amunt available fr dividends. Users may misinterpret cash flw per share as equivalent t (r better than) earnings per share.

13 Preparing the Statement f Cash Flws The Indirect Methd The indirect methd f reprting cash flws frm perating activities uses the lgic that a change in any balance sheet accunt (including cash) can be analyzed in terms f changes in ther balance sheet accunts: Thus, by analyzing changes in the liability, stckhlders equity, and nncash asset accunts, any change in the cash accunt can be indirectly determined:

14 Adjustments t Net Incme Net incme is nrmally adjusted t cash flws frm perating activities, using the fllwing steps: Step 1. Expenses that d nt affect cash are added. Such expenses decrease net incme but nt invlve cash payments and, thus, are added t net incme. Step 2. Lsses n the dispsal f assets are added and gains n the dispsal f assets are deducted. Step 3. Changes in current perating assets and liabilities are added r deducted as fllws: Increases in nncash current perating assets are deducted. Decrease in nncash current perating assets are added. Increases in current perating liabilities are added. Decreases in current perating liabilities are deducted.

15 Preparing the Statement f Cash Flws The Direct Methd (slide 1 f 2) The direct methd reprts cash flws frm perating activities as fllws: The Cash Flws frm Investing and Financing Activities sectins f the statement f cash flws are exactly the same under bth the direct and indirect methds. The amunt f net cash flw frm perating activities is als the same, but the manner in which it is reprted is different.

16 Preparing the Statement f Cash Flws The Direct Methd (slide 2 f 2) The Cash Flws frm Investing and Financing Activities sectins f the statement f cash flws are exactly the same under bth the direct and indirect methds. The amunt f net cash flw frm perating activities is als the same, but the manner in which it is reprted is different. Depreciatin expense is nt adjusted r reprted as part f cash flws frm perating activities. This is because depreciatin expense des nt invlve a cash utflw. The gain n the sale f the land is als nt adjusted and is nt reprted as part f cash flws frm perating activities. This is because the cash flw frm perating activities is determined directly, rather than by recnciling net incme. The cash prceeds frm the sale f the land are reprted as an investing activity.

17 Cnverting Incme Statement t Cash Flws frm Operating Activities using the Direct Methd

18 Determining the Cash Received frm Custmers

19 Determining the Cash Payments fr Merchandise

20 Determining the Cash Payments fr Operating Expenses

21 Determining the Cash Payments fr Interest

22 Determining the Cash Payments fr Incme Taxes

23 Financial Analysis and Interpretatin: Free Cash Flw (slide 1 f 2) Free cash flw measures the perating cash flw available t a cmpany t use after purchasing the prperty, plant, and equipment (PP&E) necessary t maintain current prductive capacity. Free cash flw is cmputed as fllws:

24 Financial Analysis and Interpretatin: Free Cash Flw (slide 2 f 2) Psitive free cash flw is favrable. A cmpany that has free cash flw is able t fund internal grwth, retire debt, pay dividends, and benefit frm financial flexibility. A cmpany with n free cash flw is unable t maintain current prductive capacity. Lack f free cash flw can be an early indicatr f liquidity prblems.

25 Appendix: Spreadsheet (Wrk Sheet) fr Statement f Cash Flws The Indirect Methd The steps in preparing this spreadsheet (wrk sheet) are as fllws: Step 1. List the title f each balance sheet accunt in the Accunts clumn. Step 2. Fr each balance sheet accunt, enter its balance in the tw Balance clumns. Place the credit balances in parentheses. Step 3. Add bth f the Balance clumns, which shuld ttal zer. Step 4. Analyze the change during the year in each nncash accunt t determine its net increase (decrease) and classify the change as affecting cash flws frm perating activities, investing activities, financing activities, r nncash investing and financing activities. Step 5. Indicate the effect f the change n cash flws by making entries in the Transactins clumns. Step 6. After all nncash accunts have been analyzed, enter the net increase (decrease) in cash during the perid. Step 7. Add the Debit and Credit Transactins clumns. The ttal shuld be equal.