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Chapter 13

Chapter 13. Reporting and Interpreting Cash Flows. Business Background. Positive cash flows permit a company to. pay dividends to owners. expand its operations. take advantage of market opportunities. replace needed assets.

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Chapter 13

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  1. Chapter 13 Reporting and Interpreting Cash Flows

  2. Business Background Positive cash flows permit a company to . . . pay dividends to owners expand its operations take advantage of market opportunities replace needed assets Financial analysts consider cash flow an important indicator of a company’s financial health.

  3. Cash Equivalents Currency Classifications on the Cash Flow Statement Cash • Short-term, highly liquid investments. • Readily convertible into cash. • So near maturity that market value is unaffected by interest rate changes.

  4. Classifications on the Cash Flow Statement The Cash Flow Statement must include the following three sections: • Operating Activities • InvestingActivities • Financing Activities

  5. Statement continued . . . The indirect method is used by most companies. Sleeman Breweries uses the indirect method.

  6. This ending cash balance should be the same amount that appears on the balance sheet.

  7. Cash Flows from Operating Activities Cash inflows and outflows that directly relate to income from normal operations reported on the income statement.

  8. + _ Cash Flows from Operating Activities Inflowsfrom: • Sales to customers • Interest and dividends received Cash Flows from Operating Activities Outflowsto: • Purchase goods to resell and services • Salaries and wages • Income taxes • Interest on liabilities

  9. Changes in current assets and current liabilities + Losses and - Gains + Non-cash expenses such as depreciation and amortization Cash Flows from Operating Activities - Indirect Method The indirect method adjusts net income by eliminating non-cash items. Cash Flows from Operating Activities - Indirect Method Net Income

  10. Inflowsfrom: Sale or disposal of property, plant, and equipment. Sale or maturity of investments in securities. + _ Cash Flows from Investing Activities Cash Flows from Investing Activities Outflowsto: • Purchase property, plant, and equipment. • Purchase investments in securities.

  11. Inflowsfrom: Borrowing on notes, mortgages, bonds, etc. from creditors Issuing equity securities to shareholders + _ Cash Flows from Financing Activities Cash Flows from Financing Activities Outflowsto: • Repay principal to creditors (excluding interest) • Repurchase equity securities from owners • Pay dividends to shareholders

  12. Relationships to the Balance Sheet and the Income Statement Information needed to prepare a cash flow statement: • Comparative Balance Sheets • Income Statement • Additional details concerning different types of transactions and events

  13. Derives from . . . Assets = Liabilities Shareholders’ Equity Relationships to the Balance Sheet and the Income Statement  Cash = Liabilities Shareholders’ Equity Non-cash Assets

  14. Relationships to the Balance Sheet and the Income Statement Use this table when adjusting Net Income to Operating Cash Flows using the indirect method.

  15. Cash Flow StatementExample of Indirect Method Using Sleeman Breweries Ltd., let us examine the preparation of the Cash Flow Statement for the quarter ended on September 29, 2001.

  16. The Statement of Cash Flows will begin with Sleeman’s Net income from the Income Statement.

  17. The Net income number will be adjusted for non-cash items. In the case of Sleeman’s, those adjustments included depreciation and amortization expense ($1,845) These numbers may not be obvious in the Income Statement, so often they must be derived from other sources, such as the Notes to the Financial Statements, or the General Ledger Trial Balance.

  18. With the indirect method, always start with the net income or net loss for the period. Next, adjust for the non-cash items included in net income.

  19. To complete the Cash flows from operating activities section, you must examine a comparative balance sheet to determine the changes in current assets and current liabilities from the beginning of the period to the end of the period.

  20. Now, make adjustments for changes in current assets and current liabilities using the decision table below.

  21. Add the $11,473 decrease in Accounts Receivable.

  22. Subtract the $3,093 increase in Inventory.

  23. Add the $1,450 decrease in Prepaid Expenses.

  24. Subtract the $2,295 decrease in Accounts Payable and Accrued Liabilities.

  25. Statement continued . . .

  26. The balance sheet indicates that Property, Plant and Equipment increased by $3,172 during the quarter.

  27. Long-term investments increased by a net $71 during the quarter.

  28. $8,636 was repaid against a line of credit during the period.

  29. Now we can reconcile the change in cash to the ending cash balance that appears on the Balance Sheet.

  30. A Comparison of the Direct and Indirect Methods • Net cash flow is the same for both methods. • The direct method provides more detail about cash from operating activities. • The investing and financing sections are identical for the two methods.

  31. End of Chapter 13 Chester, ol’ buddy, I wonder if you could help me with a little cash flow problem I’m having?

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