reporting and interpreting the statement of cash flows learning objective 1
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Reporting and Interpreting the Statement of Cash Flows Learning Objective 1. Identify cash flows arising from operating, investing, and financing activities. 12- 1. Operations Cash received and paid for day-to-day activities with customers, suppliers, and employees. - PowerPoint PPT PresentationTRANSCRIPT
Reporting and InterpretingReporting and Interpretingthe Statement of Cash the Statement of Cash FlowsFlows
Learning Objective 1Learning Objective 1
Identify cash flows arisingfrom operating, investing,and financing activities.
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OperationsOperationsCash received and paidCash received and paidfor day-to-day activitiesfor day-to-day activities
with customers, suppliers,with customers, suppliers,and employees.and employees.
InvestingCash paid and receivedfrom buying and selling
long-term assets.
FinancingCash received and paid
for exchanges withlenders and stockholders.
Business Activities and Cash Business Activities and Cash FlowsFlows
The Statement of Cash The Statement of Cash Flows focuses Flows focuses attention on: attention on:
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CashChecking and Savings Accounts
Cash EquivalentsHighly liquid short-term investments
within three months of maturity.
Business Activities and Cash Business Activities and Cash FlowsFlows
Currency
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Classifying Cash FlowsClassifying Cash Flows
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Cash inflows and outflows that directly relate to revenues and expenses reported on the income
statement.
Operating ActivitiesOperating Activities
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Direct and Indirect ReportingDirect and Indirect Reportingof Operating Cash Flowsof Operating Cash Flows
We will concentrate on the indirect method for now, and wewill look at the direct method again later in the chapter.
Same result
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Investing ActivitiesInvesting Activities
Under Armour’s 2008 Investing Activities
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Financing ActivitiesFinancing Activities
Under Armour’s 2008 Financing Activities
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Relationships Between Relationships Between Classified Balance Sheet and Classified Balance Sheet and Statement of Cash Flow (SCF) Statement of Cash Flow (SCF) CategoriesCategories
SCF Categories
Operating Current Assets Current Liabilities
Classified Balance Sheet CategoriesSCF Categories
Operating Current Assets Current Liabilities
Classified Balance Sheet CategoriesSCF Categories
Operating Current Assets Current Liabilities
Investing Noncurrent Assets
Classified Balance Sheet CategoriesSCF Categories
Operating Current Assets Current Liabilities
Investing Noncurrent Assets
Classified Balance Sheet CategoriesSCF Categories
Operating Current Assets Current Liabilities
Investing Noncurrent Assets Noncurrent Liabilities
Financing Stockholders' Equity
Classified Balance Sheet CategoriesSCF Categories
Operating Current Assets Current Liabilities
Investing Noncurrent Assets Noncurrent Liabilities
Financing Stockholders' Equity
Classified Balance Sheet Categories
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Relationship to Other Relationship to Other Financial StatementsFinancial Statements
Information needed to prepare a statement of cash flows: Comparative Balance Sheets. Income Statement. Additional details concerning selected accounts.
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Relationship to Other Financial Relationship to Other Financial StatementsStatements
Recall that the basic Balance Sheet equation is:
We can recast the equation as follows:
The following equation is true:
From this basic Balance Sheet equation, wedevelop our model to solve for the change in cash:
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Learning Objective 2Learning Objective 2
Report cash flows from operating activities, using
the indirect method.
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Cash Flows from Operating Cash Flows from Operating Activities - Indirect MethodActivities - Indirect Method
Net Income
Cash Flows from Operating Activities -
Indirect Method
Changes in current assets and current liabilities.
+ Losses and - Gains
+ Noncash expenses such as
depreciation and amortization.
The indirect method adjusts net incomeby analyzing noncash items.
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Use this table when adjusting Net Income to Operating Cash Flows using the indirect method.
Relationships to the Balance Relationships to the Balance Sheet and the Income Sheet and the Income StatementStatement
Change in accountbalances during the year
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Statement of Cash FlowsStatement of Cash FlowsIndirect Method ExampleIndirect Method Example
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Use the following financial statements for Under Armour, Inc. and prepare the Statement of Cash Flows for the year ended December 31, 2008.
Statement of Cash FlowsStatement of Cash FlowsIndirect Method ExampleIndirect Method Example
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The Statement of Cash Flows
using the indirect
method will begin with
Under Armor, Inc.’s net
income from the Income Statement.
Statement of Cash FlowsStatement of Cash FlowsIndirect Method ExampleIndirect Method Example
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Direct and Indirect ReportingDirect and Indirect Reportingof Operating Cash Flowsof Operating Cash Flows
When using the indirect method, start with accrual basis net income and adjust it for:1.items that are included in net income but do not involve cash, and 2.items that are not included in net income but do involve cash.
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Next, adjust for the non-cash items includedin net income.
For Under Armour, the only non-cash adjustmentis for depreciation.
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Accumulated Depreciation increased by $16, from $31 in the Accumulated Depreciation increased by $16, from $31 in the 2007 Balance Sheet to $47 in the 2008 Balance sheet. The same 2007 Balance Sheet to $47 in the 2008 Balance sheet. The same
$16 is shown as Depreciation in the 2008 Income Statement. $16 is shown as Depreciation in the 2008 Income Statement.
To complete the cash flows from operating activities section, To complete the cash flows from operating activities section, we must examine comparative balance sheets to determine the we must examine comparative balance sheets to determine the
changes in current assets and current liabilities from the changes in current assets and current liabilities from the beginning of the period to the end of the period.beginning of the period to the end of the period.
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Statement of Cash Flows Indirect Method Example
These five items were shown earlier in the current portions of Under Armour’s comparative Balance Sheets for 2007 and 2008
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Learning Objective 3Learning Objective 3
Report cash flows from investing activities.
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Reporting Cash Flows from Reporting Cash Flows from Investing ActivitiesInvesting Activities
We will need this additional data to preparethe investing portion of the statement.
1. No disposals or impairments of equipment or intangibles occurred
2. Equipment costing $36 million and intangibles costing $2 million were purchased with cash.
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Under Armour, Inc., has two investing activities on the Statement of Cash Flows that required the use of cash:1. Purchase of equipment, and2. Purchase of intangible and other assets.
Reporting Cash Flows from Reporting Cash Flows from Investing ActivitiesInvesting Activities
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Learning Objective 4Learning Objective 4
Report cash flows from financing activities.
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Reporting Cash Flows from Reporting Cash Flows from Financing ActivitiesFinancing Activities
We will need this additional data to preparethe financing portion of the statement.
1. No dividends were declared or paid.2. Long-term debt of $7 million was paid.3. $16 million in new long-term loans were issued.4. Shares of stock were issued for $12 million.
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Reporting Cash Flows from Reporting Cash Flows from Financing ActivitiesFinancing Activities
Long-term debt increased because of $16 inLong-term debt increased because of $16 innew loans during the year. The long-term debtnew loans during the year. The long-term debt
increase is a cash inflow.increase is a cash inflow.
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Reporting Cash Flows from Reporting Cash Flows from Financing ActivitiesFinancing Activities
Payments on long-term debt resulted in a cash outflow of $7. Payments on long-term debt resulted in a cash outflow of $7. The net effect of these two long-term debt transactions The net effect of these two long-term debt transactions increased long-term debt by $9, from $14 on the 2007 increased long-term debt by $9, from $14 on the 2007
Balance sheet to $23 on the 2008 Balance Sheet. Balance sheet to $23 on the 2008 Balance Sheet. 12-28
Reporting Cash Flows from Reporting Cash Flows from Financing ActivitiesFinancing Activities
The third financing activity is the issuance of common stock resulting The third financing activity is the issuance of common stock resulting in a cash inflow of $12. Contributed Capital increased from $163 in the in a cash inflow of $12. Contributed Capital increased from $163 in the
2007 Balance Sheet to $175 in the 2009 Balance Sheet.2007 Balance Sheet to $175 in the 2009 Balance Sheet.
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Now we can reconcile the change in cash to the ending $102 cash balance that appears on the Balance Sheet.
Reporting Cash Flows from Reporting Cash Flows from Financing ActivitiesFinancing Activities
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Noncash Investing and Noncash Investing and Financing ActivitiesFinancing Activities
Required Supplemental Information:1. Cash paid for taxes and interest.2. Significant non-cash investing and financing
activities.
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Learning Objective 5Learning Objective 5
Interpret cash flows from operating, investing, and
financing activities.
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Evaluating Cash FlowsEvaluating Cash Flows
• Operating cash flows must be positive over the long-run for a company to be successful.
• An upward trend in operating cash flows over time indicates growth and efficient operations.
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Quality ofIncome
Ratio
Net Cash Flow from Operating ActivitiesNet Income
=
A measure for determining what portion ofa company’s income was generated in cash.
A ratio near 1.0 indicates a high likelihood that A ratio near 1.0 indicates a high likelihood that revenues are realized in cash and that expensesrevenues are realized in cash and that expenses
are associated with cash outflows.are associated with cash outflows.
Evaluating Cash FlowsEvaluating Cash Flows
Quality ofIncome
Ratio
7938
= = 2.08 for Under Armour in 2008
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CapitalAcquisitions
Ratio
Net Cash Flow from Operating ActivitiesCash Paid for Property, Plant, and Equipment
=
A measure for determining whether a company is generatingenough cash internally to purchase long-term assets.
A ratio greater than 1.0 indicates that outsideA ratio greater than 1.0 indicates that outsidefinancing was not needed to purchase long-term assets.financing was not needed to purchase long-term assets.
Evaluating Cash FlowsEvaluating Cash Flows
CapitalAcquisitions
Ratio
7936
= = 2.19 for Under Armour in 2008
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