a304 ch. 11 packet (statement of cash flows)

cash basis

the statement of cash flows uses a of accounting to measure cash flows

operating cash flows

relate to normal, day-to-day operations of a company

investing cash flows

relate to the acquisition and disposition of long-term assets used in the operations of the business and investment assets

financing cash flows

relate to creditors (primarily long-term debt) and investors (such as the issuance of stock and distribution of dividends)

cash inflows

sale, collection, issuance

cash outflows

purchase, payment, lending, cash acquisition, repayment

statement of CF =

CF from operating act + CF from investing act + CF from financing act

operating

net income, adjustments for non-cash items

investing

purchase of equipment, sale of machinery

financing

issuance of stock, dividends paid

significant non-cash transactions

purchased equipment using a note

direct method, indirect method

two different formats of the statement of cash flows

direct method

specifically lists the various cash inflows and outflows from operations

indirect method

starts with net income (from IS) and then adjusts NI from accrual basis to cash basis

identical

the investing and finance sections of the statement of cash flows are ___ under both methods

direct

layout is clear and specific, useful for mgmt, but GAAP requires to show the other method aswell

indirect

easier to get data, most commonly used method, reconciliation of accrual NI to operating CF is helpful

indirect

using the ___ method, companies start with their net income and adjust for income statement items and balance sheet items

income statement items

non-cash items and non-operating items

balance sheet items

changes in current assets and current liabilities

+

• or - depreciation expense

+

• or - amortization expense

+

• or - stock-based compensation expense

+

• or - loss on sale of long-term asset

-

• or - gain on sale of long-term asset

-

• or - increases in current assets

+

• or - decreases in current assets

+

• or - increases in current liabilities

-

• or - decreases in current liabilities

balance sheet adjustments/working capital adjustments

are needed to reconcile net income with net cash from operations

purchase or sale of current investments (debt or equity securities, land held for investment), purchase or sale of long-term assets (land, PPE, intangibles), purchase or sale of other companies (subsidiaries), loaning or collecting notes from other parties (notes receivables)

what do investing CF include?

borrowing and repaying amounts from creditors (notes payable), issuing stock (common or preferred), repurchasing stock (TS) or reselling TS, paying dividends to shareholders (dividends)

what do financing CF include?

cash return on assets

measures the operating cash flows generated per dollar of assets

cash flow to sales

measures the operating cash flows generated for each dollar of sales

free cash flows

measures the available cash flows for discretionary spending

the statement of cash flows

shows patterns of cash generation and cash use that can be mapped to stages in the life-cycle

start-up

-op, -inv, +fin

growth

+op, -inv, +fin

steady

+op, -inv, -fin

decline

-op, +inv, -/+fin