The Statement of Cash Flows

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The Statement of Cash Flows
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Primary Purpose of Statement

• To provide information about
• cash receipts
• cash payments
• the net change in cash resulting from
• operating,
• investing
• financing activities of a company during a
  period.

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Questions the Statement of Cash Flows Answers
Where did the cash come from?
What was the cash used for?
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Meaning of Cash Flows

• Cash equivalents are
• readily convertible to known amounts of cash
• so near maturity that their market value is
  relatively insensitive to changes in interest
  rates.
• treasury bills
• commercial paper
• money market funds
• The term cash includes cash equivalents.

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Operating Activities...

• Include
• The cash effects of transactions that create
  revenues and expenses and
• Enter into determination of net income.

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Investing Activities...

• Include
• Acquiring and disposing of investments and
  productive long-lived assets.
• Lending money and collecting the loans.

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Financing Activities...

• Include
• Obtaining cash from issuing debt and repaying the
  amounts borrowed
• Obtaining cash from stockholders and paying them
  dividends.

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Types of Cash Flows -Operating Activities
Illustration 12-1

• Cash inflows
• From sale of goods or services
• From return on loans (interest received) and on
  equity securities (dividends received)
• Cash outflows
• To suppliers for inventory
• To employees for services
• To government for taxes
• To lenders for interest
• To others for expenses

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Types of Cash Flows -Investing Activities
Illustration 12-1

• Cash inflows
• From sale of property, plant, and equipment
• From sale of debt or equity securities of other
  entities
• From collection of principal on loans to other
  entities
• Cash outflows
• To purchase property, plant, and equipment
• To purchase debt or equity securities of other
  entities
• To make loans to other entities

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Types of Cash Flows -Financing Activities
Illustration 12-1

• Cash inflows
• From sale of equity securities (company's own
  stock)
• From issuance of debt (bonds and notes)
• Cash outflows
• To stockholders as dividends
• To redeem long-term debt or reacquire capital
  stock

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Operating Activities
ALERT

• Some cash flows relating to investing or
  financing activities are classified as operating
  activities. For example...
• Receipts of investment revenue (interest and
  dividends) and
• Payments of interest to lenders are classified as
  operating activities because these items are
  reported in the income statement.

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Significant Noncash Activities...

• That do not affect cash are NOT reported in the
  body of the statement of cash flows.
• Are reported
• In a separate schedule at the bottom of the
  statement of cash flows or
• In a separate note or supplementary schedule to
  the financial statements.

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Significant Noncash Activities...

• 1. Issuance of common stock to purchase assets.
• 2. Conversion of bonds into common stock.
• 3. Issuance of debt to purchase assets.
• 4. Exchanges of plant assets.

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Format for Statement of Cash Flows

• Three activities
• operating
• investing
• financing
• PLUS
• noncash investing and financing activities

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Product Life Cycle

• A series of phases all products go through
• The phases are often referred to as
• introductory phase
• growth phase
• maturity phase
• decline phase.
• The phase a company is in affects its cash flows.

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Introductory Phase...

• To support asset purchases the company may issue
  stock or debt. Expect
• cash from operations to be negative
• cash from investing to be
  negative.
• cash from financing to be
  positive.

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Growth Phase

• The company is striving to expand its production
  and sales.
• Expect
• small amounts of cash to be generated from
  operations.
• cash from investing to be negative.
• cash from financing to be positive

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Maturity Phase

• Sales and production level-off
• Expect
• cash from operations to exceed investing needs
• cash from investing to be
  neutral
• cash from financing to be
  negative

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Decline Phase

• Sales and production decline
• Expect
• cash from operations to decline
• cash from investing to possibly become positive
• cash from financing to possibly become negative

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Illustration 12-3
Impact of Product Life Cycle on Cash Flows
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Why Report Causes of Changes in Cash?
Because investors, creditors, and other
interested parties want to know what is happening
to a companys most liquid asset, CASH
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Statement of Cash Flows Helps Users Evaluate

• 1. The companys ability to generate future cash
  flows.
• 2. The companys ability to pay dividends and
  meet obligations.
• 3. The reasons for the difference between net
  income and net cash provided (used) by operating
  activities.
• 4. The investing and financing transactions
  during the period.

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Statement of Cash Flows Helps Answer the
Following Questions

• How did cash increase when there was a net loss
  for the period?
• How were the proceeds of the bond issue used?
• How was the expansion in the plant and equipment
  financed?
• Why were dividends not increased?
• How was the retirement of debt accomplished?
• How much money was borrowed during the year?
• Is cash flow greater or less than net income?

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Free Cash Flow

• Cash Provided By Operations
• Capital Expenditures
• Dividends Paid Free Cash Flow

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Capital Expenditure Ratio

• An indicator of a company's ability to generate
  sufficient cash to finance new fixed assets.
• Capital expenditures are purchases of fixed
  assets.

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Capital Expenditure Ratio

Cash Provided by Operations Capital
Expenditures
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Assessing Liquidity, Solvency, and Profitability
Using Cash Flows

• Rather than using numbers from the income
  statement for assessment purposes, we use numbers
  from the statement of cash flows.

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