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Reporting and Interpreting the Statement of Cash Flows Learning Objective 1

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.

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Reporting and Interpreting the Statement of Cash Flows Learning Objective 1

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  1. Reporting and Interpretingthe Statement of Cash FlowsLearning Objective 1 Identify cash flows arisingfrom operating, investing,and financing activities. 12-1

  2. Operations Cash received and paidfor day-to-day activitieswith customers, suppliers,and employees. The Statement of Cash Flows focuses attention on: InvestingCash paid and receivedfrom buying and sellinglong-term assets. FinancingCash received and paidfor exchanges withlenders and stockholders. Business Activities and Cash Flows 12-2

  3. Checking and Savings Accounts Currency Cash Equivalents Highly liquid short-term investmentswithin three months of maturity. Cash Business Activities and Cash Flows 12-3

  4. Classifying Cash Flows 12-4

  5. Operating Activities Cash inflows and outflows that directly relate to revenues and expenses reported on the income statement. 12-5

  6. Direct and Indirect Reportingof 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 12-6

  7. Investing Activities Under Armour’s 2008 Investing Activities 12-7

  8. Financing Activities Under Armour’s 2008 Financing Activities 12-8

  9. Relationships Between Classified Balance Sheet and Statement of Cash Flow (SCF) Categories 12-9

  10. Information needed to prepare a statement of cash flows: • Comparative Balance Sheets. • Income Statement. • Additional details concerning selected accounts. Relationship to Other Financial Statements 12-10

  11. 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: Relationship to Other Financial Statements 12-11

  12. Learning Objective 2 Report cash flows from operating activities, usingthe indirect method. 12-12

  13. 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. Cash Flows from Operating Activities - Indirect Method Net Income Cash Flows from Operating Activities - Indirect Method 12-13

  14. Change in accountbalances during the year Relationships to the Balance Sheet and the Income Statement Use this table when adjusting Net Income to Operating Cash Flows using theindirect method. 12-14

  15. 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 FlowsIndirect Method Example 12-15

  16. Statement of Cash FlowsIndirect Method Example 12-16

  17. 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 FlowsIndirect Method Example 12-17

  18. When using the indirect method, start with accrual basis net income and adjust it for: items that are included in net income but do not involve cash, and items that are not included in net income but do involve cash. Direct and Indirect Reportingof Operating Cash Flows 12-18

  19. Next, adjust for the non-cash items includedin net income. For Under Armour, the only non-cash adjustmentis for depreciation. 12-19

  20. Accumulated Depreciation increased by $16, from $31 in the 2007 Balance Sheet to $47 in the 2008 Balance sheet. The same $16 is shown as Depreciation in the 2008 Income Statement. To complete the cash flows from operating activities section, we must examine comparative balance sheets to determine the changes in current assets and current liabilities from the beginning of the period to the end of the period. 12-20

  21. 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 12-21

  22. Learning Objective 3 Report cash flows from investing activities. 12-22

  23. Reporting Cash Flows from Investing Activities We will need this additional data to preparethe investing portion of the statement. • No disposals or impairments of equipment or intangibles occurred • Equipment costing $36 million and intangibles costing $2 million were purchased with cash. 12-23

  24. Reporting Cash Flows from Investing Activities • Under Armour, Inc., has two investing activities on the Statement of Cash Flows that required the use of cash: • Purchase of equipment, and • Purchase of intangible and other assets. 12-24

  25. Learning Objective 4 Report cash flows from financing activities. 12-25

  26. Reporting Cash Flows from Financing Activities We will need this additional data to preparethe financing portion of the statement. • No dividends were declared or paid. • Long-term debt of $7 million was paid. • $16 million in new long-term loans were issued. • Shares of stock were issued for $12 million. 12-26

  27. Reporting Cash Flows from Financing Activities Long-term debt increased because of $16 innew loans during the year. The long-term debtincrease is a cash inflow. 12-27

  28. Reporting Cash Flows from Financing Activities Payments on long-term debt resulted in a cash outflow of $7. The net effect of these two long-term debt transactions increased long-term debt by $9, from $14 on the 2007 Balance sheet to $23 on the 2008 Balance Sheet. 12-28

  29. Reporting Cash Flows from Financing Activities The third financing activity is the issuance of common stock resulting in a cash inflow of $12. Contributed Capital increased from $163 in the 2007 Balance Sheet to $175 in the 2009 Balance Sheet. 12-29

  30. Reporting Cash Flows from Financing Activities Now we can reconcile the change in cash to the ending $102 cash balance that appears on the Balance Sheet. 12-30

  31. Noncash Investing and Financing Activities • Required Supplemental Information: • Cash paid for taxes and interest. • Significant non-cash investing and financing activities. 12-31

  32. Learning Objective 5 Interpret cash flows from operating, investing, and financing activities. 12-32

  33. Evaluating 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. 12-33

  34. Quality ofIncomeRatio Quality ofIncomeRatio = = 7938 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 revenues are realized in cash and that expensesare associated with cash outflows. Evaluating Cash Flows = 2.08 for Under Armour in 2008 12-34

  35. CapitalAcquisitionsRatio CapitalAcquisitionsRatio = = 7936 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 outsidefinancing was not needed to purchase long-term assets. Evaluating Cash Flows = 2.19 for Under Armour in 2008 12-35

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