Chapter 12 Statement of Cash Flows
Learning Objective 12-1 Identify cash flows arising from operating, investing, and financing activities.
Operations Cash received and paidfor day-to-day activitieswith customers, suppliers,and employees. Business Activities and Cash Flows 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.
Checking and Savings Accounts Currency Cash Equivalents Highly liquid short-term investmentswithin three months of maturity. Business Activities and Cash Flows Cash
Classifying Cash Flows UNDER ARMOUR, INC. Statement of Cash Flows For the Year Ended December 31, 2010 (in millions) Net cash provided (used) by operating activities Net cash provided (used) by investing activities Net cash provided (used) by financing activities Net Change in Cash and Cash Equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year $ 37 (41) 7 3 187 $ 190
Operating Activities Cash inflows and outflows that directly relate to revenues and expenses reported on the Income Statement.
Investing Activities Under Armour’s 2010 Investing Activities
Financing Activities Under Armour’s 2010 Financing Activities
Relationships Between Classified Balance Sheet and Statement of Cash Flow (SCF) Categories
Relationship to Other Financial Statements Information needed to prepare a Statement of Cash Flows: • Comparative Balance Sheets. • Income Statement. • Additional details concerningselected accounts.
Relationship to Other Financial Statements 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:
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
Learning Objective 12-2 Report cash flows from operating activities, using the indirect method.
Changes in Current Assets and Current Liabilities. + Losses and - Gains + Noncash expenses such as Depreciation and Amortization. Cash Flows from Operating Activities - Indirect Method The indirect method adjusts Net Incomeby analyzing noncash items. Cash Flows from Operating Activities - Indirect Method Net Income
Relationships to the Balance Sheet and the Income Statement Change in accountbalances during the year Use this table when adjusting Net Income to operating cash flows using theindirect method.
Statement of Cash FlowsIndirect Method Example Use the following financial statements for Under Armour, Inc. and prepare the Statement of Cash Flows for the year ended December 31, 2010.
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
Direct and Indirect Reportingof Operating Cash Flows 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.
Next, adjust for the non-cash items includedin Net Income. For Under Armour, the only non-cash adjustmentis for Depreciation Expense.
Accumulated Depreciation increased by $17, from $70 in the 2009 Balance Sheet to $87 in the 2010 Balance sheet. The same $17 is shown as Depreciation Expense in the 2010 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.
These five items were shown earlier in the current portions of Under Armour’s comparative Balance Sheets for 2009 and 2010
Learning Objective 12-3 Report cash flows from investing activities.
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 $30 million and Intangibles costing $11 million were purchased with Cash.
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 Intangibles and Other Assets.
Learning Objective 12-4 Report cash flows from financing activities.
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 $5 million was paid. • $9 million in new long-term loans were issued. • Shares of Stock were issued for $3 million.
Reporting Cash Flows from Financing Activities Long-term Debt increased because of $9 innew loans during the year. The long-term Debtincrease is a Cash inflow.
Reporting Cash Flows from Financing Activities Payments on Long-term Debt resulted in a Cash outflow of $5. The net effect of these two Long-term Debt transactions increased Long-term Debt by $4, from $25 on the 2009 Balance Sheet to $29 on the 2010 Balance Sheet.
Reporting Cash Flows from Financing Activities The third financing activity is the issuance of Common Stock resulting in a Cash inflow of $3. Contributed Capital increased from $224 in the 2009 Balance Sheet to $227 in the 2010 Balance Sheet.
Reporting Cash Flows from Financing Activities Now we can reconcile the change in Cash to the ending $190 Cash balance that appears on the Balance Sheet.
Noncash Financing and Investing Activities • Required Supplemental Information: • Cash paid for taxes and interest. • Significant non-cash investing and financing activities.
Learning Objective 12-5 Interpret cash flows from operating, investing, and financing activities.
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. Look at the relationship between operating cash flows and Net Income. Evaluating Operating Cash Flows
Healthy companies tend to show negative cash flows in the investing activities section. Be cautious over a positive total cash flow in the investing activities section Evaluating Investing Cash Flows
It’s not possible to evaluate the company’s financing cash flows by simply determining whether they are positive or negative on an overall basis. Instead, consider detailed line items with this section to assess the company’s overall financing strategy. Evaluating Financing Cash Flows
Learning Objective 12-6 Report and interpret cash flows from operating activities using the direct method.
Reporting Operating Cash Flows with the Direct Method Provides more detailed information Identifies cash inflows and outflows relationships Prepared by adjusting accrual basis to cash basis Investing and financing sections for the two methods are identical
Direct Method Operating Activities When we prepared the operating section using the indirect method, we also arrived at net cash inflow of $37. Let’s see how we arrive at these cash flows.
Direct Method Operating Activities With the direct method, we convert each revenue and expense on the Income Statement to a cash flow.
Supplement 12A Reporting Disposals of Property, Plant, and Equipment (Indirect Method)
Reporting Sales of Property, Plant, and Equipment (PPE) (Indirect) Depreciation Expense A loss on the sale of PPE is added back to Net Income just as Depreciation Expense is added back. Adding these noncash items restores Net Income to what it would have been had Depreciation and the loss not been subtracted at all. Loss on Saleof PPE Just the opposite is true for a gain on the sale of PPE. Subtracting the gain reverses the effect of the gain having been added to Net Income. Gain on Saleof PPE
Supplement 12B T-Account (Indirect Method)
T-account Approach (Indirect Method) T Instead of creating schedules for each section of the Statement of Cash Flows, some prefer to prepare a single large T-account to represent the changes that have taken place in Cash subdivided into the three sections of the Statement of Cash Flows.
Supplement 12C Spreadsheet Approach (Indirect Method)
Reconstructing the events and transactions that occurred during the period helps identify the operating, investing and financing activities to be reported. A spreadsheet can be used to ensure that no reportable activities are inadvertently overlooked. Spreadsheet Approach (Indirect Method)