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Module 6 Statement of Cash Flows

Module 6 Statement of Cash Flows. Motorola and Blockbuster. History. Statement of Sources and Uses of Funds Funds Statement Statement of Changes in Financial Position SFAS 95 – Statement of Cash Flows effective for annual financial statements for FY ending after 7/15/88. Overview of SCF.

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Module 6 Statement of Cash Flows

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  1. Module 6Statement of Cash Flows

  2. Motorola and Blockbuster

  3. History • Statement of Sources and Uses of Funds • Funds Statement • Statement of Changes in Financial Position • SFAS 95 – Statement of Cash Flows effective for annual financial statements for FY ending after 7/15/88

  4. Overview of SCF • One of the major financial statements • Purpose is to provide information about cash inflows and outflows • Explains the changes in cash • What is cash and cash equivalents?? • Cash • Short term investments in T-bills, commercial paper and money market funds

  5. Three classifications of cash flow activity • Operating • Investing • Financing

  6. Operating Activities • Cash inflows from: • Sales of goods or services • Interest • Dividends • Sale of trading securities • Cash outflows from: • Merchandise inventory • Salaries • Interest expense • Purchase of trading securities

  7. Investing Activities • Cash inflows from: • Sales of property, plant and equip • Sale of available for sale and held-to-maturity securities • Collection of money loaned to others • Cash outflows for: • Purchase of property, plant and equipment • Purchase of securities above • Making loans to others

  8. Financing Activities • Cash inflows from: • Capital stock • Debt (loans, bonds, notes) Cash outflows for: • Buying back corporate stock (Treasury stock) • Paying the principal portion of debt • Paying cash dividends to shareholders

  9. Tips for categorizing • Look at company’s perspective, not the type of account involved. • Example – dividends • Example – loans • Example – common stock

  10. Users of SCF Info • Management • Stockholders • Creditors • FASB prohibits companies from disclosing cash flow per share

  11. Presentation Method • Direct v. indirect • Difference lies in operating section • Direct method • Recommended by FASB • Shows classes of gross receipts and disbursements • Indirect method • Starts with net income (accrual basis) and adjusts to a cash basis income • Used by more companies

  12. Operating Income v. Cash Flows

  13. How do I use the information? • Adjusted Cash Flow to Income Ratio • Disclosure – operating income • Cash inflows primarily coming from asset sales, borrowing or equity offerings • Computer adjusted cash flow and income from continuing operations • Cash flow ambiguities • Motley Fool’s view

  14. Enron

  15. Caution Flags • Failure to generate cash from operating activities • Large fluctuations in cash flow from operating activities over time • Net income and cash flow from operations not tracking closely • Net income and cash flow from operations moving in different directions • Positive cash flow from investing activities because company is selling off assets to generate cash

  16. Caution Flags • Positive cash flow from financing activities for several periods –0 possibly indicating borrowing needed to offset lack of internet cash generation • Company highlights cash flow in shareholders’ letter, especially in same paragraph discussing falling stock price • Adjustments to net income from changes in receivables, inventories, and payables not in line with sales • Management’s explanation of adjustments to net income obtuse or missing

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