Chap013

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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Statement of Cash Flows

Chapter 13

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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Understanding the BusinessPositive cash flows permit a company to . . .

Expand its operations

.

Expand its operations

.

Replace needed assets.

Replace needed assets.

Take advantage of market

opportunities.

Take advantage of market

opportunities.

Pay dividends to

owners.

Pay dividends to

owners.

Wall Street analysts consider cash flow an important indicator of a company’s

financial health.

Wall Street analysts consider cash flow an important indicator of a company’s

financial health.

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CashCashCurrency

Cash Equivalents

Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by

interest rate changes (i.e., original maturities of less than 3 months).

Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by

interest rate changes (i.e., original maturities of less than 3 months).

Classifications of the Statement of Cash Flows

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Classifications of the Statement of Cash Flows

Operating Activities

Cash inflows and outflows directly related to earnings

from normal operations.

Investing Activities

Cash inflows and outflows related to the acquisition or sale of productive

facilities and investments in the securities of other companies.

Financing Activities

Cash inflows and outflows related to external sources of financing (owners and creditors) for the

enterprise.

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Investing ActivitiesOperating Activities Financing ActivitiesSale of operational assets

Sale of investments

Collections of loans

Cash received from revenues

Issuance of stock

Issuance of bonds and notes

CASH INFLOWS

Business

CASH OUTFLOWS

Purchase of operational assets

Purchase of investmentsLoans to others

Cash paid for expenses

Payment of dividends

Repurchase of stock

Repayment of debt

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Cash flows from operating activities: Net income 24,742$ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,891 Changes in assets and liabilities: Accounts receivable (4,549)

Inventory (858)Prepaid expense 6,457Accounts payable (1,798)Accrued expenses 2,604

Net cash provided by operating activities 35,489Cash flows for investing activities: Purchases of property, plant and equipment (6,658)

167 Purchase of short-term investments (109,450) Proceeds from short-term investments 112,450 Net cash used by investing activities (3,491) Cash flows from financing activities: Purchase of treasury stock (305) Proceeds from issuance of stock 950 Net cash used in financing activities 645 Net increase (decrease) in cash & cash equivalents 32,643 Cash & cash equivalents at beginning of period 51,497 Cash & cash equivalents at end of period 84,140$

Consolidated Statement of Cash FlowsNATIONAL BEVERAGE CORP.

Proceeds from disposal of property, plant & equipment

Year Ended April 30, 2009

This ending cash balance should agree with the balance sheet.

This ending cash balance should agree with the balance sheet.

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Direct Method vs. Indirect Method

Two Formats for Reporting Operating Activities

Reports the cash effects of each operating

activity

Direct Method

Starts with accrual net income and converts to cash basis

Indirect Method

Note that no matter which format is used, the same amount of net cash flows from operating activities is

generated.

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Cash Flows from Operating Activities

Cash Flows from


Cash Flows from


Inflows Cash received from: Customers Dividends and interest on

investments

Inflows Cash received from: Customers Dividends and interest on

investments

+

Outflows Cash paid for: Purchase of goods for resale

and services (electricity, etc.) Salaries and wages Income taxes Interest on liabilities

Outflows Cash paid for: Purchase of goods for resale

and services (electricity, etc.) Salaries and wages Income taxes Interest on liabilities

_

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Cash Flows from


Cash Flows from


+

Cash Flows from Investing Activities

Inflows Cash received from: Sale or disposal of property,

plant and equipment Sale or maturity of investments

in securities

Inflows Cash received from: Sale or disposal of property,

plant and equipment Sale or maturity of investments

in securities

_

Outflows Cash paid for: Purchase of property, plant and

equipment Purchase of investments in

securities

Outflows Cash paid for: Purchase of property, plant and

equipment Purchase of investments in

securities

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Cash Flows from


Cash Flows from


+

_

Cash Flows from Financing ActivitiesInflows

Cash received from: Borrowings on notes,

mortgages, bonds, etc. from creditors

Issuing stock to owners

Inflows Cash received from: Borrowings on notes,

mortgages, bonds, etc. from creditors

Issuing stock to owners

Outflows Cash paid for: Repayment of principal to

creditors (excluding interest, which is an operating activity)

Repurchasing stock from owners

Dividends to owners

Outflows Cash paid for: Repayment of principal to

creditors (excluding interest, which is an operating activity)

Repurchasing stock from owners

Dividends to owners

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Relationships to the Balance Sheet and the Income Statement

Information needed to prepare a statement of cash flows:

Comparative Balance Sheets. Income Statement. Additional details concerning

selected accounts.

Information needed to prepare a statement of cash flows:

Comparative Balance Sheets. Income Statement. Additional details concerning

selected accounts.

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Cash = Liabilities Stockholders’ Equity Noncash Assets

Cash = Liabilities Stockholders’ Equity Noncash Assets

Derives from . . .

Assets = Liabilities Stockholders’ Equity

Assets = Liabilities Stockholders’ Equity

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Category Transactions Cash Effect Other Account AffectedOperating Collect accounts receivable +Cash -Accounts Receivable (A)

Pay accounts payable -Cash -Accounts Payable (L)Prepay rent -Cash +Prepaid Rent (A)Pay interest -Cash -Retained Earnings (SE)Sale for cash +Cash +Retained Earnings (SE)

Investing Purchase equipment for cash -Cash +Equipment (A)Sell investment securities for cash +Cash -Investments (A)

Financing Pay back debt to bank -Cash -Notes Payable-Bank (L)Issue stock for cash +Cash +Common Stock and

Paid-in-Capital (SE)

Selected Cash Transactions and Their Effect on Other Balance Sheet Accounts

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Reporting and Interpreting Cash Flows from Operating

Net Income

Net Income

Cash Flows from Operating

Activities: Indirect Method

Cash Flows from Operating

Activities: Indirect Method

+/- Changes in current assets and current

liabilities.

+/- Changes in current assets and current

liabilities.

+ Losses and - Gains

+ Losses and - Gains

+ Noncash expenses such as depreciation and

amortization.

+ Noncash expenses such as depreciation and

amortization.

The indirect method adjusts net income by eliminating noncash items.

The indirect method adjusts net income by eliminating noncash items.

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Use this table when adjusting Net Income Use this table when adjusting Net Income to Operating Cash Flows using the to Operating Cash Flows using the

indirect method.indirect method.

Reporting and Interpreting Cash Flows from Operating

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Adjustment for Gains and Losses

GainsGains must be subtracted from net

income to avoid double counting the gain.

Losses Losses must be added to net income to avoid double counting the loss.

Transactions that cause gains and losses should be classified on the statement of cash flows as operating,

investing, or financing activities, depending on their dominate characteristics. For example, if the sale of

equipment produced a gain, it would be classified as an investing activity.

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April 30, April 30,

Dollars in Thousands 2009 2008 Changes

ASSETSCurrent assets:

Cash & cash equivalents 84,140$ 51,497$ 32,643 Short-term investments - 3,000 (3,000) Accounts Receivable 53,735 49,186 4,549 Inventories 39,612 38,754 858 Prepaid expenses 5,552 12,009 (6,457)

Total current assets 183,039 154,446 Equipment, net 79,381 81,781 (2,400) Total assets 262,420$ 236,227$

LIABILITIES & STOCKHOLDERS' EQUITYCurrent liabilities:

Accounts payable 48,005$ 49,803$ (1,798)Accrued expenses 44,403 41,799 2,604

Total current liabilities 92,408 91,602 Stockholders' Equity:

Contributed capital 9,803 9,158 645Retained earnings 160,209 135,467 24,742

Total stockholders' equity 170,012 144,625Total liabs & stockholders' equity 262,420$ 236,227$

NATIONAL BEVERAGE GORP.Consolidated Balance Sheet

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The Statement of Cash Flows will begin with net income from the Income

Statement.

The Statement of Cash Flows will begin with net income from the Income

Statement.

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Cash flows from operating activities: Net income 24,742$ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,891 Changes in assets and liabilities: Accounts receivable

Inventory Prepaid expense Accounts payable Accrued expenses

Net cash provided by operating activities



Step 1Adjust net income for depreciation and

amortization expense.

Step 1Adjust net income for depreciation and

amortization expense.

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Step 2Adjust net income for changes in

current assets and current liabilities.

Step 2Adjust net income for changes in

current assets and current liabilities.

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Interpreting Cash Flows from Operating Activities

Investors will not invest in a company if they do not believe that cash generated from operations

will be available to pay them dividends or expand the company.

Creditors will not lend money if they do not believe that cash generated from operations will be

available to pay back the loan.

A common rule of thumb followed by financial and credit analysts is to avoid firms with rising net income but

falling cash flow from operations.

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International Perspective—IFRS Classification of Interest on the Cash Flow Statement

U.S. GAAP and IFRS differ in the cash flow statement treatment of

interest received and interest paid.

These differences are currently on the agenda of the joint FASB/IASB financial statement

presentation project.

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Quality of Income Ratio

In general, this ratio measures the portion of income that was generated in cash. All other things equal, a higher quality of income ratio indicates greater ability to finance operating

and other cash needs from operating cash inflows.

Cash Flow from Operating Activities Net Income

Quality of Income Ratio

=

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April 30, April 30,











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We must report individually the

cash used to purchase

equipment and the cash proceeds

received from the sale of

equipment.

We must report individually the

cash used to purchase

equipment and the cash proceeds

received from the sale of

equipment.








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Although short-term

investments is a current asset, it is reported in

the investing section on

the statement of cash flows.

Although short-term

investments is a current asset, it is reported in

the investing section on

the statement of cash flows.








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In general, this ratio reflects the portion of purchases of property, plant and equipment financed from operating

activities. A high ratio indicates less need for outside financing for current

and future expansions.

Capital Acquisitions Ratio

Cash Flow from Operating Activities Cash Paid for Property, Plant,

and Equipment

Capital Acquisitions

Ratio=

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In general, this measures a firm’s ability to pursue long-term investment opportunities.

Free Cash Flow

Free Cash Flow = Cash Flow from Operating Activities – Dividends – Capital Expenditures

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April 30, April 30,











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The net increase in Contributed

Capital of was caused by two transactions:

Repurchase of outstanding stock

and

Proceeds from the issuance of

common stock.

The net increase in Contributed

Capital of was caused by two transactions:

Repurchase of outstanding stock

and

Proceeds from the issuance of

common stock.








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Interpreting Cash Flows from Financing Activities

The long-term growth of a company is normally financed from three sources: internally

generated funds, the issuance of stock, and money borrowed on a long-term basis.

The statement of cash flows shows how management has elected to fund its growth. This

information is used by analysts who wish to evaluate the capital structure and growth

potential of a business.

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Completing the Statement and Additional Disclosures

Three Required Disclosures1.Reconciliation of net income to cash flow from operations2.Noncash investing and financing activities3.Cash paid for interest and income taxes

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Supplement A: Reporting Cash Flows from Operating Activities—Direct Method

Sales revenue + Decrease in accounts receivable

- Increase in accounts receivable= Cash collected from customers

Interest/Dividend revenue+ Decrease in interest/dividends

receivable- Increase in interest/dividends

receivable= Collections of interest/dividends

on investments

Cost of goods sold+ Increase in inventory- Decrease in inventory- Increase in accounts payable+ Decrease in accounts payable= Cash payments to suppliers

Other expenses+ Increase in prepaid expenses- Decrease in prepaid expenses- Increase in accrued expenses+ Decrease in accrued expenses= Cash paid for expenses

Income tax expense+ Increase in prepaid income taxes- Decrease in prepaid income taxes- Increase in income taxes payable+ Decrease in income taxes payable= Payments of income taxes

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Remember that when we prepared the operating section using the indirect method, we also arrived at net cash inflow of $35,489.

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Supplement B: Adjustments for Gains and Losses on Sale of Long-term Assets: Indirect Method

Property, plant, and equipment with an original cost of $10,000 and accumulated depreciation of $4,000 is sold

for $8,000 cash.

Because the gain was included in the computation of income, it is necessary to remove (subtract) the $2,000

gain from the Operating Activities section of the statement to avoid double counting.

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Supplement C: Spreadsheet Approach

The spreadsheet approach offers a systematic way to keep track of data. A

spreadsheet is organized as follows:

1. Four columns to record dollar amounts are established (beginning balance, debit changes, credit changes, and ending balance).

2. On the far left of the top half of the spreadsheet, each account name from the balance sheet is entered.

3. On the far left of the bottom half of the spreadsheet, the name of each item that will be reported on the statement of cash flows is entered.

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After entering all

the transactions illustrated in the textbook, this is what

the spreadsheet looks like.

30-Apr-08 Debits Credits 30-Apr-09Balance SheetAssets:Cash and equivalents 51,497 (n) 32,643 84,140 Short-term investments 3,000 (k) 109,450 (j) 112,450 - Accounts receivable 49,186 (d) 4,549 53,753 Inventories 38,754 (e) 858 39,612 Prepaid expenses 12,009 (f) 6,457 5,552 Equipment, net 81,781 (i) 6,658 (b) 8,891 79,381

(c) 167 Accounts payable 49,803 (g) 1,798 48,005 Accrued expenses 41,799 (h) 2,604 44,403 Contributed capital 9,158 (l) 305 (m) 950 9,803 Retained earnings 13,467 (a) 24,742 160,209

Statement of Cash Flows SubtotalsCash flows from operating activities: Net income (a) 24,742 Adj. to reconcile net income to net cash provided by operating activities: Depreciation and amortization (b) 8,891 Changes in assets and liabilities: Accounts receivable (d) 4,549 Inventory (e) 858 Prepaid expense (f) 6,457 Accounts payable (g) 1,798 Accrued expenses (h) 2,604 Net cash provided by operating activities 35,489 Cash flows for investing activities: Proceeds from sale of equipment (c) 167 Purchases of property, plant and equipment (i) 6,658 Maturities (sale) of short-term investments (j) 112,450 Purchase of short-term investments (k) 109,450 Net cash provided by investing activities (3,491) Cash flows from financing activities: Purchase of treasury stock (l) 305 Proceeds from issuance of stock (m) 950 Net cash used in financing activities 645 Net increase in cash & cash equivalents (n) 32,643

312,522 312,522 32,643

NAIONAL BEVERAGE CORP.Changes

Inflows Outflows

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End of Chapter 13

Chap013

Economy & Finance

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