(2) Statement of Cash Flows

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(2) Statement of Cash Flows
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The Function of the CF Statement

• The Statement of cash flows shows
• Where did the company obtain its cash
• 2. How did the company spend its cash
• 3. Why the cash balance changed from the
  beginning to the end of the accounting period.

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Cash and Cash Equivalents

• Statement of Cash Flows includes
• Cash
• Cash equivalents
• Money market accounts
• Commercial paper
• Treasury bills

Excerpt from IBM 2008 Annual Report
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Statement of Cash Flows
Operating Activities
Investing Activities
Financing Activities
CASH INFLOWS
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Statement of Cash Flows
Cash Inflows
CASH OUTFLOWS
Investing Activities
Financing Activities
Operating Activities
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Classification of Cash Flows

• The statement of cash flows classifies cash
  receipts and cash payments into three major
  categories

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The Format of CF Statement
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Operating Activities (CF from ongoing operations)

• Involve the cash inflows and outflows from
  activities that enter into the determination of
  net income

• Cash Inflows
• Receipts from sale of goods and services
• Receipts from sale of trading securities
• Interest and dividends

• Cash Outflows
• Payments for wages, inventory, expenses,
  interest, and taxes
• Payments for purchase of trading securities

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Investing Activities (CF from buying/selling
generally non-current assets)

• Involve the acquisition and sale of property,
  plant, and equipment and other long-term assets,
  including long-term investments and the making
  and collecting of loans

• Cash Inflows
• Receipts from selling plant assets
• Receipts from selling marketable securities and
  long-term investments
• Collections on loans

• Cash Outflows
• Expenditures on purchases of plant assets
• Expenditures on purchases of securities and
  long-term investments
• Cash lent to borrowers

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Financing Activities (CF from Dealing with the
providers of capital)

• Obtaining resources from stockholders and
  providing them with a return on their
  investments, and obtaining resources from
  creditors and repaying the amounts borrowed
  (settling the obligations)

• Cash Inflows
• Proceeds from stock issues and from short- and
  long-term borrowing
• Sales of treasury stock

• Cash Outflows
• Repayments of loans (excluding interest)
• Payments to owners, including cash dividends
• Purchases of treasury stock

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Classification of Cash Inflows and Cash Outflows
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Noncash Investing and Financing Transactions

• Significant transactions that involve only
  long-term assets, long-term liabilities, or
  stockholders equity

• Noncash examples
• Exchange of long-term asset for a long-term
  liability
• Settle a debt by issuing capital stock
• Take out a long-term mortgage to purchase real
  estate

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Components of CF Statement
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Indirect method begins with net income and
ends with cash flows from operating activities

• Operating Activities section

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Cash transactions involving capital
expenditures and loans
Investing Activities section
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Financing Activities section
Debt, stock, dividend, and treasury stock
transactions
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Reconciliation of beginning and ending balances
of cash
Ties to cash balances of the balance sheets
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Determining Cash Flowsfrom Operating Activities

• The direct method
• Adjusts each item on the income statement to its
  cash equivalent
• More easily understood by the average reader
• The indirect method
• Lists only necessary adjustments to convert net
  income to net cash flows
• Superior from an analysts perspective
• Used by most companies
• Both methods produce the same net figure

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Indirect Method Adjustments to Net Income
Cash Income
Cash Expenses
Cash Revenue
Collections

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Payments
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Accrued Revenue
Accrued Expenses
Accrued Income