Kế toán doanh nghiệp - Chapter 12: Statement of cash flows

Chapter 12statement of Cash FlowsMcGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.Understanding the BusinessPositive cash flows permit a company to . . .Expand its operations.Replace needed assets.Take advantage of market opportunities.Pay dividends to owners.Wall Street analysts consider cash flow an important indicator of a company’s financial health.12-2CashCurrencyCash EquivalentsShort-term, highly liquid investments.Readily convertible into cash.So near maturity that market value is unaffected by interest rate changes (i.e., original maturities of less than 3 months).Classifications of the Statement of Cash Flows12-3Classifications of the Statement of Cash FlowsOperating ActivitiesCash inflows and outflows directly related to earnings from normal operations.Investing ActivitiesCash inflows and outflows related to the acquisition or sale of productive facilities and investments in the securities of other companies.Financing ActivitiesCash inflows and outflows related to external sources of financing (owners and creditors) for the enterprise.12-4Investing ActivitiesOperating ActivitiesFinancing ActivitiesSale of operational assetsSale of investmentsCollections of loansCash received from revenuesIssuance of stockIssuance of bonds and notesCASH INFLOWSBusinessCASH OUTFLOWSPurchase of operational assetsPurchase of investmentsLoans to othersCash paid for expensesPayment of dividendsRepurchase of stockRepayment of debt12-5Direct Method vs. Indirect MethodReports the cash effects of each operating activityDirect MethodStarts with accrual net income and converts to cash basisIndirect MethodNote that no matter which format is used, the same amount of net cash flows from operating activities is generated.12-6Two Formats for Reporting Operating ActivitiesCash Flows from Operating ActivitiesCash Flows from Operating ActivitiesInflows Cash received from:CustomersDividends and interest on investments+Outflows Cash paid for:Purchase of goods for resale and services (electricity, etc.)Salaries and wagesIncome taxesInterest on liabilities_12-7Cash Flows from Investing Activities+Cash Flows from Investing ActivitiesInflows Cash received from:Sale or disposal of property, plant and equipmentSale or maturity of investments in securities_Outflows Cash paid for:Purchase of property, plant and equipmentPurchase of investments in securities12-8Cash Flows from Financing Activities+_Cash Flows from Financing ActivitiesInflows Cash received from:Borrowings on notes, mortgages, bonds, etc. from creditorsIssuing stock to ownersOutflows Cash paid for:Repayment of principal to creditors (excluding interest, which is an operating activity)Repurchasing stock from ownersDividends to owners12-912-10RELATIONSHIPS TO THE BALANCE SHEET AND THE INCOME STATEMENTReporting and interpreting cash Flows from Operating ActivitiesNet IncomeCash Flows from Operating Activities: Indirect Method+/- Changes in current assets and current liabilities.+ Losses and - Gains+ Noncash expenses such as depreciation and amortization.The indirect method adjusts net income by eliminating noncash items. 12-11Use this table when adjusting Net Income to Operating Cash Flows using the indirect method.12-12Reporting and interpreting cash Flows from Operating ActivitiesAdjustment for Gains and LossesGainsGains must be subtracted from net income to avoid double counting the gain.LossesLosses must be added to net income to avoid double counting the loss.Transactions that cause gains and losses should be classified on the statement of cash flows as operating, investing, or financing activities, depending on their dominate characteristics. For example, if the sale of equipment produced a gain, it would be classified as an investing activity. 12-13Interpreting Cash Flows from Operating Activities12-14Investors will not invest in a company if they do not believe that cash generated from operations will be available to pay them dividends or expand the company.Creditors will not lend money if they do not believe that cash generated from operations will be available to pay back the loan.A common rule of thumb followed by financial and credit analysts is to avoid firms with rising net income but falling cash flow from operations. Quality of Income RatioIn general, this ratio measures the portion of income that was generated in cash. All other things equal, a higher quality of income ratio indicates greater ability to finance operating and other cash needs from operating cash inflows. Cash Flow from Operating ActivitiesNet IncomeQuality of Income Ratio=12-15In general, this ratio reflects the portion of purchases of property, plant and equipment financed from operating activities. A high ratio indicates less need for outside financing for current and future expansions.Capital Acquisitions Ratio Cash Flow from Operating Activities Cash Paid for Property, Plant, and EquipmentCapital Acquisitions Ratio=12-16In general, this measures a firm’s ability to pursue long-term investment opportunities.Free Cash FlowFree Cash Flow = Cash Flow from Operating Activities – Dividends – Capital Expenditures12-17End of Chapter 1212-18