Statement of Cash Flows

Chapter 12

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Statement of Cash Flows

Income
Statement

Balance
Sheet
Statement of
Cash Flows

The statement of cash flows highlights the major activities

that impact cash flows and ,hence, affect the overall cash
balance.
12-2

Purpose of the Statement of Cash

Flows
Are
Arecash
cashflows
flows
sufficient
sufficientto
to
support
supportongoing
ongoing
operations?
operations?
Will
Will the
thecompany
company
have
haveto
toborrow
borrow
money
moneyto
tomake
make
needed
needed
investments?
investments?

Can
Canwe
wepay
pay
debts?
debts?

Why
Whyis
isthere
thereaa
difference
difference
between
betweennet
net
income
incomeand
andnet
net
cash
cashflow?
flow?

Can
Can we
wepay
pay
dividends?
dividends?

12-3

A Fundamental Principle
Cash Balance = Noncash Balance Sheet Accounts

This principle ensures that properly

analyzing the changes in all noncash
balance sheet accounts always
quantifies the cash inflows and
outflows that explain the change in the
cash balance.
12-4

A Review of Basic Equations

Basic Equation for Asset Accounts
Beginning balance + Debits Credits = Ending balance

Basic Equation for Contra-Asset, Liability, and

Stockholders Equity Accounts
Beginning balance Debits + Credits = Ending balance

12-5

Statement of Cash Flows: Key

Concepts
The term cash on the statement of cash flows refers
broadly to both currency and cash equivalents.
Cash
Currency and
Bank Accounts

Cash
Equivalents
Treasury Commercial Money Market
Funds
Bills
Paper
12-6

Organizing a Statement of Cash Flows

Operating
Activities

Revenue and expense

transactions that affect
net income.

Investing
Activities

Acquiring or disposing of
noncurrent assets.

Financing
Activities

Borrowing from and

repaying principal to
creditors and transactions
with stockholders.
12-7

Organizing a Statement of Cash Flows

12-8

Operating Activities: Direct or Indirect

Method?
Direct Method

Indirect Method

Reconstructs the
income statement
on a cash basis
from top to bottom

Accrual net
income is adjusted
to a cash basis;
Used by 99%

Both methods result in the exact same amount of

cash provided by operating activities.
12-9

The Indirect Method: A Three-Step

Step 1
Process

Step 2

Step 3

12-10

Summary of Key Concepts

12-11

Summary of Key Concepts

12-12

Free Cash Flows

Free cash flow measures a companys ability to
fund its capital expenditures and dividends from
its net cash provided by operating activities.

12-13

Earnings Quality
Managers generally perceive that
earnings are of higher quality
when the earnings:
1.are not unduly influenced by
inflation,
2.are computed using
conservative accounting
principles and estimates, and
3.are correlated with net cash
provided by operating activities.
12-14

Computing Net Cash Provided by

Operating Activities
The direct method computes
net cash provided by operating
activities by reconstructing the
income statement on a cash
basis from top to bottom.

Net cash provided by operating

activities under the direct method will
always agree with the amount
computed using the indirect method.
12-15

Similarities and Differences in Handling

Data
Adjustments for accounts
that affect revenue are the
same in the direct and
indirect methods.
Adjustments for accounts
that affect expenses are
handled in opposite ways
for the direct and indirect
methods.
12-16

Similarities and Differences in Handling

Data
Under the direct method,
no adjustments for gains
and losses on the sale of
assets are needed.

12-17

Special RulesDirect and Indirect Methods

Direct Method

Indirect Method

Requires a
reconciliation
between net
income and the net
cash provided by
operating activities

Requires
disclosure of
amount of interest
and income taxes
paid during the
year

12-18

End of Chapter 12

12-19