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Ch.12 Statement of Cash Flows

Ch.12 Statement of Cash Flows. Prof. J. Wang. How to read statement of cash flows How to prepare statement of cash flows. Part I How to read statement of cash flows?. How much cash did the company generate from its operations?

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Ch.12 Statement of Cash Flows

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  1. Ch.12Statement of Cash Flows Prof. J. Wang

  2. How to read statement of cash flows • How to prepare statement of cash flows

  3. Part IHow to read statementof cash flows?

  4. How much cash did the company generate from its operations? • Was the cash generated from its operations enough to pay for capital expenditures? • Was the cash from operations, after paying for net capital expenditures, adequate to pay its shareholders’ dividends?

  5. Free cash flows • The amount of cash that remain after deduction net capital expenditure and dividends from cash from operations. • If free cash flows are positive, it means that the company has met all its planned cash commitments and has cash available for expansion or reducing debt.

  6. Part IIHow to preparestatement of cash flows

  7. from balance sheets Statement of Cash Flows Format Cash flows from operating activities: Inflows $ xxx Outflows (xxx) Net cash provided (used) by operating activities $xxx Cash flows from investing activities: Inflows $ xxx Outflows (xxx) Net cash provided (used) by investing activities xxx Cash flows from financing activities: Inflows $ xxx Outflows (xxx) Net cash provided (used) by financing activities xxx Net increase (decrease) in cash and cash equivalents $xxx Cash and cash equivalents at beginning of year xxx Cash and cash equivalents at end of year $xxx Cash flows from operating activities: Inflows $ xxx Outflows (xxx) Net cash provided (used) by operating activities $xxx Cash flows from investing activities: Inflows $ xxx Outflows (xxx) Net cash provided (used) by investing activities xxx Cash flows from financing activities: Inflows $ xxx Outflows (xxx) Net cash provided (used) by financing activities xxx Net increase (decrease) in cash and cash equivalents $xxx Cash and cash equivalents at beginning of year xxx Cash and cash equivalents at end of year $xxx

  8. 1. Classification of cash flows • Operating activities • Investing activities • Financing activities

  9. Payment to suppliers for inventory Collection of customer accounts Operating Activities Cash transactions concerned with acquiring and selling products and services (income statement activities) Payment of wages Payment of taxes

  10. Capital expenditures Sale of property, plant, and equipment Investing Activities Cash transactions concerned with acquiring and disposing of long-term assets Purchase/sale of another company

  11. Issuance/repurchase of stock Issuance/repayment of bank note Payment of dividends Date Dept. of Treasurer Jane Doe Paycheck for Financing Activities Cash transactions concerned with the raising and repayment of funds in the form of debt and equity Issuance/retirement of bonds

  12. Operating Activities Investing Activities Long-term liabilities or stockholders’ equity Long-term assets Financing Activities Categorizing Cash Flow Activities Current assets and current liabilities

  13. 2. Methods to Report Cash from Operating Activities • Direct Method • Reports major classes of gross cash receipts and cash payments The amount of cash provided by operating activities is the same under both methods • Indirect Method • Adjusts net income to remove the effect of all accruals and deferrals LO4

  14. Statement of Cash Flows Format Cash flows from operating activities: Inflows $ xxx Outflows (xxx) Net cash provided (used) by operating activities $xxx Cash flows from investing activities: Inflows $ xxx Outflows (xxx) Net cash provided (used) by investing activities xxx Cash flows from financing activities: Inflows $ xxx Outflows (xxx) Net cash provided (used) by financing activities xxx Net increase (decrease) in cash and cash equivalents $xxx Cash and cash equivalents at beginning of year xxx Cash and cash equivalents at end of year $xxx Only section of statement that differs in form between direct and indirect method (net cash flow total is the same)

  15. Direct method Cash flows from operations: Cash collected from operations xxx Less: cash paid for operations Purchase of inventory xxx Salaries xxx Income taxes xxx Interest expense xxx xxx Net cash provided/used by operations xxx Start with the income statement and adjust for changes in current assets and liabilities For example, to compute cash collected from sales: Sales + beginning A/R – ending A/R Or Sales +/- decrease/increase in A/R

  16. Indirect method Cash flows from operations: Net income xxx Adjustments to convert net income to cash flows from operating activities: Add: non-cash expenses/losses xxx Less: non-cash gains xxx +/- decrease/increase in current assets xxx +/- increase/decrease in current liab. xxx xxx Net cash provided/used by operations xxx

  17. Cash flows from investing activities • Examining the change in long-term assets • Examine additional transaction information

  18. Cash flows from financing activities • Examining the change in long-term liabilities and shareholders’ equity • Examine additional transaction information

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