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13-1
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
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)
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
Operating Activities
Cash Flows from
Operating Activities
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
Investing Activities
Cash Flows from
Investing Activities
+
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
Financing Activities
Cash Flows from
Financing Activities
+
_
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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Relationships to the Balance Sheet and the Income Statement
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
Consolidated Statement of Cash FlowsNATIONAL BEVERAGE CORP.
Year Ended April 30, 2009
Step 1Adjust net income for depreciation and
amortization expense.
Step 1Adjust net income for depreciation and
amortization expense.
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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)
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
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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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)
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
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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
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)
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
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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.
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)
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
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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
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)
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
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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
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