Chapter 12 – Statement of Cash Flows

Explains how the amount of cash on the balance sheet at the beginning of the period has become the amount of cash reported at the end of the period. The Statement of Cash Flows Reports cash inflows and outflows in three broad categories: 1) Operating Activities, 2) Investing Activities, and 3) Financing activities. Together, these three cash flow categories explain the change in cash from the beginning balance to the ending balance on the balance sheet.

A short-term, highly liquid investment with an original maturity of less than three months.

Are cash inflows and outflows directly related to earning from normal operations. There are 2 alternative ways to present this information: the Direct Method and the Indirect Method.

Reports components of cash flows from operating activities as gross receipts and gross payments.

The difference between the inflows and outflows.

Adjusts net income to compute cash flows from operating activities. Net Income + or - Adjustments for non cash items = Net Cash inflow (outflow) from operating activities. - If you use the indirect method of presenting cash flows from operations must also provide two extra figures: 1) Cash Paid for Interest 2) Cash Paid for Income Taxes

Cash inflows and outflows related to the acquisition or sale of productive facilities and investments in the securities of other companies.

Difference between these investing related cash inflows and outflows.

Include exchanges of cash with creditors (debt holders) and owners (stockholders). - Are cash inflows and outflows related to external sources of financing (owners and creditors) for the enterprise.

Difference between these financing related cash inflows and outflows.

The combination of the net flows from operating activities, investing activities, and financing activities must equal the net increase (decrease) in cash for the reporting period.

US GAAP IFRS

Analytical Question: How much cash does each dollar of net income generate. Quality of Income Ratio = Cash Flow from Operating Activities / Net Income - All things being equal, a higher quality of income ratio indicates grater ability to finance operating and other cash needs from operating cash inflows. - When this ratio does not equal 1, analysts must establish the sources of the difference to determine the significance of the findings. Four potential causes of any difference: 1) The corporate lifecycle (growth or decline in sales). 2) Seasonality 3) Changes in revenue and expense recognition. 4) Changes in management of operating assets and liabilities. pg 603

- Only purchases paid for with cash or cash equivalents are included. - The amount of cash that is received from the sale of assets is included, regardless of whether the assets are sold at a gain or loss.

Analytical Question: To what degree was the company able to finance purchases of property, plant, and equipment with cash provided by operating activities? Capital Acquisitions Ratio = Cash Flow from Operating Activities / Cash Paid for Property, Plant, and Equipment A high ratio indicates less need for outside financing for current and future expansion.

Managers and analysts often calculate free cash flow as a measure of a firm's ability to pursue long term investment opportunities. Free Cash Flow = Cash Flow from Operating Activities - Dividends - Capital Expenditures

- Cash repayments of principal are cash flows from financing activities. - Interest payments are cash flows from operating activities. - Dividend payments are cash flows from financing activities. - If debt or stock is issued for other than cash, it is not included in this section.

Transactions that do not have direct cash flow effects; they are reported as a supplement to the statement of cash flows in narrative or schedule form.