STATEMENT OF CASH FLOWS handout

Chapter 14-1 Statement of Cash Flows Chapter Chapter 14 14 Chapter Chapter 14 14 Financial Accounting, Sixth Edition Chapter 14-2 1. Indicate the usefulness of the statement of cash flows. 2. Distinguish among operating, investing, and financing activities. 3. Prepare a statement of cash flows using the indirect method. 4. Analyze the statement of cash flows. Study Objectives Study Objectives Study Objectives Study Objectives Chapter 14-3 The Statement of The Statement of Cash Flows: Cash Flows: Usefulness and Usefulness and Format Format The Statement of The Statement of Cash Flows: Cash Flows: Usefulness and Usefulness and Format Format Preparing the Preparing the Statement of Statement of Cash Flows— Cash Flows— Indirect Method Indirect Method Preparing the Preparing the Statement of Statement of Cash Flows— Cash Flows— Indirect Method Indirect Method Using Cash Using Cash Flows to Evaluate Flows to Evaluate a Company a Company Using Cash Using Cash Flows to Evaluate Flows to Evaluate a Company a Company Usefulness Usefulness Classifications Classifications Significant Significant noncash activities noncash activities Format Format Preparation Preparation Indirect and direct Indirect and direct methods methods Step 1: Operating Step 1: Operating activities activities Step 2: Investing Step 2: Investing and financing and financing activities activities Step 3: Net Step 3: Net change in cash change in cash Free cash flow Free cash flow Statement of Cash Flows Statement of Cash Flows Statement of Cash Flows Statement of Cash Flows Chapter 14-4 SO 1 Indicate the usefulness of the statement of cash flows. Provides information to help assess: 1. Entity’s ability to generate future cash flows. 2. Entity’s ability to pay dividends and obligations. 3. Reasons for difference between net income and net cash provided (used) by operating activities. 4. Cash investing and financing transactions during the period. Usefulness of the Statement of Cash Flows Usefulness of the Statement of Cash Flows Usefulness of the Statement of Cash Flows Usefulness of the Statement of Cash Flows Chapter 14-5 SO 2 Distinguish among operating, investing, and financing activities. Classification of Cash Flows Classification of Cash Flows Classification of Cash Flows Classification of Cash Flows Income Statement Items Operating Activities Generally Long-Term Asset Items Investing Activities Generally Long-Term Liability and Equity Items Financing Activities Chapter 14-6 Classification of Typical Inflows and Outflows Classification of Cash Flows Classification of Cash Flows Classification of Cash Flows Classification of Cash Flows SO 2 Distinguish among operating, investing, and financing activities. Operating activities - Income statement items Cash inflows: From sale of goods or services. From interest received and dividends received. Cash outflows: To suppliers for inventory. To employees for services. To government for taxes. To lenders for interest. To others for expenses. Illustration 14-1 Chapter 14-7 Classification of Typical Inflows and Outflows Classification of Cash Flows Classification of Cash Flows Classification of Cash Flows Classification of Cash Flows SO 2 Distinguish among operating, investing, and financing activities. Investing activities - Changes in investments and long- term assets Cash inflows: From sale of property, plant, and equipment. From sale of investments in debt or equity securities. From collection of principal on loans to other entities. Cash outflows: To purchase property, plant, and equipment. To purchase investments in debt or equity securities. To make loans to other entities. Illustration 14-1 Chapter 14-8 Classification of Typical Inflows and Outflows Classification of Cash Flows Classification of Cash Flows Classification of Cash Flows Classification of Cash Flows SO 2 Distinguish among operating, investing, and financing activities. Financing activities - Changes in long-term liabilities and stockholders’ equity Cash inflows: From sale of common stock. From issuance of long-term debt (bonds and notes). Cash outflows: To stockholders as dividends. To redeem long-term debt or reacquire capital stock. Illustration 14-1 Chapter 14-9 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. Companies report these activities in either a separate schedule at the bottom of the statement of cash flows or in a separate note or supplementary schedule to the financial statements. Classification of Cash Flows Classification of Cash Flows Classification of Cash Flows Classification of Cash Flows SO 2 Distinguish among operating, investing, and financing activities. Chapter 14-10 Order of Presentation: 1. Operating activities. 2. Investing activities. 3. Financing activities. The cash flows from operating activities section always appears first, followed by the investing and financing sections. Direct Method Indirect Method Format of the Statement of Cash Flows Format of the Statement of Cash Flows Format of the Statement of Cash Flows Format of the Statement of Cash Flows SO 2 Distinguish among operating, investing, and financing activities.