LECTURE 29 Cash Flow Statements humani Stockphoto PURPOSE

LECTURE 29 Cash Flow Statements © human/i. Stockphoto

PURPOSE OF THE CASH FLOW STATEMENT • The primary purpose of the cash flow statement is to provide information about the cash receipts and cash payments of an entity during a period. • A secondary objective is to provide information about its – Operating activities – Investing activities – Financing activities

Purpose of Statement of Cash Flows • Provide information about cash receipts and payments during an accounting period • Helps us see how financial position changes during an accounting period • Only statement that collects and shows in one statement the causes of changes in cash during a financial reporting period

Cash and Cash Equivalents • Cash includes currency on hand demand deposits • Cash equivalents are short-term, highly liquid investments that are – Readily convertible to known amounts of cash – So near maturity that they are not likely to change in value due to changes in interest rates

MEANING OF CASH FLOWS • The cash flow statement is usually prepared using cash and cash equivalents as its basis. • Cash equivalents are short-term, highly liquid investments that are both 1. readily convertible to known amounts of cash, and 2. so near to their maturity that their market value is relatively insensitive to changes in interest rates.

CLASSIFICATION OF CASH FLOWS • Operating activities • Investing activities • Financing activities

OPERATING ACTIVITIES • Include – Cash effects of transactions that create revenues and expenses and – Enter into determination of net income (loss) Balance Sheet: Noncash Current Assets and Current Liabilities; Income Statement Items

Operating Activities • Transactions that generally involve producing and delivering goods and providing services • Inflows – selling goods and services, interest and dividend revenue • Outflows – inventory, salary exp, interest exp

INVESTING ACTIVITIES • Include – Purchasing and disposing of investments and productive long-lived assets using cash and – Lending money and collecting the loans Balance Sheet: Investment and Long-Term Asset Items

Investing Activities • Buying and selling plant assets and securities, and making loans and collecting on them • Inflows – sale of plant assets and investment securities, collecting loans • Outflows – purchasing plant assets, investment securities

FINANCING ACTIVITIES • Include – Obtaining cash from issuing debt and repaying the amounts borrowed and – Obtaining cash from owners/shareholders and paying them drawings/dividends Balance Sheet: Long-Term Liability and Equity Items

Financing Activities • Obtaining resources from owners and providing return, and obtaining resources from creditors and repaying principal • Inflows – issuing stock, bonds, other short and long-term borrowing • Outflows – purchasing treasury stock, repaying principal, cash dividends

SIGNIFICANT NONCASH ACTIVITIES • If it does not affect cash, do NOT report in body of cash flow statement • Report in separate note to the financial statements

Basic Interpretation of Statement of Cash Flows • Overall, how successful has management been in generating and investing cash flows? • How does accrual basis net income compare with cash basis?

Basic Interpretation of Statement of Cash Flows • What cash uses have been made for investing activities, and to what extent has cash from operations been sufficient to pay for these investments? • What sources and uses have been generated from financing activities?

ILLUSTRATION 29 -2 FORMAT OF CASH FLOW STATEMENT Operating, investing, and financing plus the significant noncash investing and financing activities constitute the general format of the cash flow statement, an example of which is shown on the right. COMPANY NAME Cash Flow Statement Period Covered Cash flows from operating activities (List of individual items) XX Net cash provided (used) by operating activities Cash flows from investing activities (List of individual items) XX Net cash provided (used) by investing activities Cash flows from financing activities (List of individual items) XX Net cash provided (used) by financing activities Net increase (decrease) in cash Cash at beginning of period Cash at end of period Note x: Noncash investing and financing activities (List of significant noncash transactions) XXX XXX