Statement of Cash Flows answers questions such as:

1
Statement of Cash Flows answers questions such
as

• Is the company generating sufficient positive
  cash flows from its ongoing operations to remain
  viable?
• Will the company be able to meet its financial
  obligations to creditors?
• Will the company be able to pay its customary
  cash dividend?
• Why is there a difference between net income and
  net cash flow for the year?
• To what extent will the company have to borrow
  money in order to make needed investments?

2
Statement of Cash Flows

• Reports the Cash Effects
• of an enterprises operations (through CA CL)
• its investing transactions (LT Assets)
• its financing transactions (LT Liabilities
  Owners Equity)
• Should Reconcile Net Income to Net Cash Flow from
  operating activities

3
Statement of Cash FlowsInvesting Activities

• Cash Received From
• Collection of principal from debtors
• Sale of loans to third parties
• Sale of debt or equity securities of other
  entities
• Sale of property, plant equipment
• Cash Paid For
• Loans made or purchased by the entity
• Purchase of debt or equity securities of other
  entities
• Purchase of property, plant equipment

4
Statement of Cash FlowsFinancing Activities

• Cash Received From
• Issuance of equity securities (stock)
• Sale of bonds, mortgages, notes other
  short-term or long-term borrowings
• Cash Paid For
• Cash dividends
• Purchase of treasury stock
• Repayment of principal on amounts borrowed

5
Statement of Cash FlowsOperating Activities

• Cash Received From
• Producing selling goods
• Providing services
• Interest
• Dividends
• other
• Cash Paid For
• Inventory
• Salaries wages
• Taxes, duties, fines, fees, penalties
• Interest
• Other expenses

6
Balance Sheet 8 Major Classifications

• 1) Current Assets
• Cash
• Short-Term Investments
• Receivables
• Inventories
• Prepaid Expenses
• 2) Long-Term Investments
• 3) Property, Plant Equipment
• 4) Intangible Assets
• 5) Other Assets

• 6) Current Liabilities
• 7) Long-Term Liabilities
• 8) Owners Equity
• Capital Stock
• Additional Paid-in Capital
• Retained Earnings
• Treasury Stock
• Other Items of Comprehensive Income

7
Statement of Cash FlowsDirect vs. Indirect
Methods

• Direct Method
• Requires a supplemental reconciliation of net
  income to cash flow from operating activities.
• Net income is reconstructed on a cash basis.
• Used by 2.5 of companies.

• Indirect Method
• No supplemental schedule is required.
• Net income is reconciled to cash flow from
  operating activities.
• Used by 97.5 of companies.

8
Statement of Cash FlowsIndirect Method

• CASH FLOW FROM OPERATING ACTIVITIES
• Net Income
• Non-cash Expenses
• - Non-cash Revenues
• - Increases in Current Assets
• Decreases in Current Assets
• - Decreases in Current Liabilities
• Increase in Current Liabilities
• /- Losses Gains Reported on the Income
  Statement
• Net Cash Flow from Operating Activities
• CASH FLOW FROM INVESTING ACTIVITIES
• Net Decrease in all other Long Term Assets
• - Net Increase in all other Long Term Assets
• Net Cash Flow from Investing Activities
• CASH FLOW FROM FINANCING ACTIVITIES
• Net Decrease in all other LT Liabilities
  Equities
• - Net Increase in all other LT Liabilities
  Equities

9
Statement of Cash Flows

• Reports the Cash Effects
• of an enterprises operations (through CA CL)
• its investing transactions (LT Assets)
• its financing transactions (LT Liabilities
  Owners Equity)
• Should Reconcile Net Income to Net Cash Flow from
  operating activities

10
Statement of Cash FlowsIndirect Method

• CASH FLOW FROM OPERATING ACTIVITIES
• Net Income
• Non-cash Expenses
• - Non-cash Revenues
• - Increases in Current Assets
• Decreases in Current Assets
• - Decreases in Current Liabilities
• Increase in Current Liabilities
• /- Losses Gains Reported on the Income
  Statement
• Net Cash Flow from Operating Activities
• CASH FLOW FROM INVESTING ACTIVITIES
• Net Decrease in all other Long Term Assets
• - Net Increase in all other Long Term Assets
• Net Cash Flow from Investing Activities
• CASH FLOW FROM FINANCING ACTIVITIES
• Net Decrease in all other LT Liabilities
  Equities
• - Net Increase in all other LT Liabilities
  Equities

11
Interpretation of the Statement of Cash Flows

• Examine the operating activities section
  carefully.
• Negative cash flow is usually a sign of
  fundamental difficulties.
• Ultimately, a positive cash flow is necessary to
  avoid liquidating assets or borrowing money to
  pay for day-to-day activities.

12
Evaluate Financial Liquidity

• Net Cash Provided by Operations
• Average Current Liabilities
• Current Cash Debt Coverage Ratio

13
Evaluate Financial Flexibility

• Net Cash Provided by Operations
• Average Total Liabilities
• Cash Debt Coverage Ratio

14
Evaluate Financial Flexibility

• Net Cash Provided by Operations
• - Capital Expenditures
• - Cash used for dividends
• Free Cash Flow