CHAPTER 21 THE STATEMENT OF CASH FLOWS REVISITED

CHAPTER 21 THE STATEMENT OF CASH FLOWS REVISITED

Learning Objectives Ø Discuss: The importance of Cash Ø Ø Cash Flow Statement and its purpose Ø Understand the differences: FASB and IFRS Ø Prepare comprehensive Cash Flow Statement Ø Ø 2 Economic and Financial Crisis (Comprehensive Illustration) Prepare the presentation & disclosures.

The purpose of Cash Flow Statement the survival, growth and profitability of the business STRATEGIC DECISION Assess the financial health of a business Investors Shareholders Creditors Employees Managers/owners: warning signs 3

Definition of “Cash” Define Cash (Cash and Cash Equivalent) Highly liquid, Short-Term investments (money market funds), Treasury bills, commercial paper

Structure of the Cash Flow Statement PRIMARY ELEMENTS OF THE CASH FLOWS Reports: cash inflows and outflows OPERATING ACTIVITIES core of the business INVESTING ACTIVITIES long-term assets investment FINANCING ACTIVITIES long-term debt and equity = NET INCREASE (DECREASE) IN CASH 5

FASB 95/IAS 7 FASB 95 Interest payments (operating ) Interest/dividends received (operating) Dividends paid (financing ) IAS 7 Classification of Cash Flow same except: Research…… DIFFERENCES: Classification 6

FASB 95: Statement of Cash Flow FASB Identifies two methods: The indirect method derives cash flows from accrual basis statements. (also called reconciliation method) The direct method determines cash flows directly for each source or use of cash. Difference…. OPERATING ACTIVITIES ONLY 7

Cash Flow Illustration Preparing Comprehensive Cash Flow Statement Illustration… Additional consideration: Bonds payable Discount/premium on bonds payable Convertible bonds Retirement of bonds Stock: Preferred/common Convertible preferred Treasury Stock 8 Dividends Cash/stock dividends Deferred Tax Lease Pension Investment: using equity method