Statement of Cash Flows

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Statement of Cash Flows 1
07

• Accountancy 503
• Fall 2006
• Professor Clifton Brown

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Objectives of financial reporting
Financial reporting provides information about a
firm to help investors and creditors assess the
amounts, timing, and uncertainty of future cash
flows from
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• Dividends or interest,
• Proceeds from the sale, redemption, or maturity
  of the firms equity securities or loans to the
  firm.

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Cash flow information
Prospective investor/creditor returns are
affected by an entitys ability to generate
sufficient cash in its business to

• Meet its cash operating needs,
• Meet its obligations when due,
• Reinvest in operations (both maintain capital and
  grow)
• Pay in cash dividends.

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Accrual accounting cash flows
Accountants measure income statement elements
using accrual accounting concepts.

• Recognition of revenues does not necessarily
  coincide with receipts of cash from customers.
• Recognition of expenses does not necessarily
  coincide with disbursement of cash to suppliers
  and employees.

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Accrual accounting cash flows
Accountants also measure balance sheet elements
using accrual accounting concepts

• Recognition of assets does not necessarily
  coincide with payment of cash for acquisition
• Recognition of liabilities does not necessarily
  coincide with receipt/payment of cash.

Consequently, GAAP requires companies to include
a statement of cash flows as one its financial
reports.
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Statement of cash flows
The statement reports cash flows provided (used)
by each of three primary activities

• Operating activities Selling goods and
  providing services.
• Investing activities Acquisitions/sales of
  non-current assets.
• Financing activities Issuance/redemption of
  short- and long-term borrowing and capital stock.

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Statement formats
Direct format

• First section presents cash flows from operations
  directly
• Collections from customers,
• Payments to suppliers, to employees, and so
  forth.
• Second and third sections present cash flows from
  investing activities and cash flows from
  financing activities.
• A fourth section presents a reconciliation of net
  income and net cash flows from operations.

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Cash From Operations Direct Format
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Indirect format

• Cash provided from operations section is the
  reconcilia-tion section of the direct format.
• Second and third sections present cash flows from
  investing activities and cash flows from
  financing activities in the same manner as the
  direct format.

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Electronic Warehouse
Prepare Electronic Warehouses 2004 Statement of
Cash Flows using information from its balance
sheet and statement of earnings.
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Depreciation amortization
Accountants subtract depreciation and
amortization expenses in determining net
income. Therefore, to adjust net income to cash
flows we should add these expenses back to net
income.
Electronic Warehouse Accum. depreciation
amortization, beg. Accum. depreciation
amortization, end. Depreciation amortization
expense
772
1,027
255
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Accounts receivable
Cash collected from customers Accrued sales
A/Rbeg A/Rend
Because accountants add sales in calculating net
income, the adjustment retains its algebraic sign
when adjusting net income to cash flows.
A/Rbeg A/Rend
Electronic Warehouse A/Rbeg A/Rend 221 -
312 -91
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Inventory
Cost of Goods Sold INVbeg Purchases
INVend Purchases Cost of Goods Sold INVbeg
INVend
Because accountants subtract cost of goods sold
in calculating net income, the adjust-ments
algebraic sign must be reversed when adjusting
net income to cash flows.
INVbeg INVend
Electronic Warehouse INVbeg INVend 1,875 -
2,046 -171
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Accounts payable
Cash payments to suppliers
Purchases A/Pbeg A/Pend
Because accountants subtract cost of goods sold
in calculating net income, the adjust-ments
algebraic sign must be reversed when adjusting
net income to cash flows.
A/Pend A/Pbeg
Electronic Warehouse A/Pend A/Pbeg 2,195 -
2,202 -7
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Cash flows from operating activities
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Cash flows from investing activities
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Cash flows from financing activities
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Statement of cash flows (summary)
Electronic WarehouseStatement of Cash Flows
(Summary)
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Usefulness of cash flow information

• How strong is the firms internal cash flow
  generation?
• Is the cash flow from operations positive or
  negative? If negative, why?
• Does the firm have the ability to meet its
  short-term obligations from its operating cash
  flow?
• How much did the firm invest in growth?
• Are such investments consistent with the firms
  business strategy?
• Did the firm use internal cash flow or external
  financing?
• Did the firm pay dividends from internal cash
  flow or from external financing?
• Does the firm have free cash flow after
  maintaining its capital? What are its plans for
  its free cash flow?

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Interpretation of cash flow patterns
It is important to interpret a firms cash flows
from the perspectives of its business strategy
and its product life cycles.
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Turn-in a case write-up
The following individuals should e-mail a
write-up of Electronic Warehouse to the
instructor no later than 24-hours from now
Akalin, Devrim Bhataramongkol, Navatath Chiang,
Yi-Kuang Cho, Sunghee Earl, Arthur J. Hardwidge,
Mark
Huang, Hao-Chieh Lee, Szu-Hsien Lin,
Yao-Chen Muttayasuwan, Pongsathorn Yermukhanov,
Turlan