Statement of Cash Flows

Understand the purpose of SCF

Distinguish between its three sections
Understand the difference between the direct and indirect
methods for the Operations section
Understand Cash Flow from Operations and how it is derived
from Net Income
Practice these concepts
15.515 2003
Session 9
1
Statement of Cash Flows
Beginning Balance
Assets = Liabilities + S.E.
Cash + OA = Liabilities + CC + Div NI -
Assets = Liabilities + S.E.
Ending Balance
Cash +/- other stuff = NI
15.515 2003
Session 9
2
Statement of Cash Flows
Fixed claimants (lenders)
Residual claimants (shareholders)
Managers
Why do we need a separate financial statement?
15.515 2003
Session 9
3
W. T. Grant Bankruptcy
90
40
-10
1966 1967 1968 1969 1970 1971 1972 1973 1974
-60
-110
-160
15.515 2003
Session 9
4
W. T. Grant Bankruptcy
-160
-110
-60
-10
40
90
1966196719681969197019711972197319741975
15.515 2003
Session 9
5
W. T. Grant Bankruptcy
6
Session 9
-160
-110
-60
-10
40
90
1966196719681969197019711972197319741975
Operating Cash Flow
Net Income
15.515 2003
Consolidated Freightways
0
1994 1995 1996 1997 2000 2001
Net Income
Operating Cash Flow
-60,000
-40,000
-20,000
20,000
40,000
60,000
80,000
100,000
120,000
140,000
1998 1999 2002
15.515 2003
Session 9
7
Montgomery Wards Bankruptcy
Session 9
0
200
400
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7

Operating Cash Flow

Net Income
15.515 2003
-1400
-1200
-1000
-800
-600
-400
-200
8
Planet Hollywood Bankruptcy
-300000
-250000
-200000
-150000
-100000
-50000
0
50000
100000
94 95 96 97 98 99
Operating Cash Flow
Net Income
15.515 2003
Session 9
9
Enron
0
1000
2000
3000
4000
5000
6000
1995 1996 1997 1998 1999 2000 2001
Net Income
Operating Cash Flow
-2000
-1000
15.515 2003
Session 9
10
Statement of Cash Flows
Direct or indirect statements
Categorize transactions into one of the following:
Operating Activities
cash provided by the sale of goods or service, including interest
and dividends received
cash used to pay operating expenses, including interest expense
Investing Activities
cash used to buy long-term assets and investments
cash obtained by selling long-term assets and investments
Financing Activities
cash provided by issuing stock or debt instruments
cash used to repay debt principal and repurchase stock
cash used to pay dividends, but NOT interest paid on debt
15.515 2003
Session 9
11
Statement of Cash Flows
Direct: start from cash transactions
Investing and Financing sections ==> always direct
Indirect: start from NI, back out accruals
Cash flow amount from operations ==> same as direct
Key difference: Derivation of cash flow from operations
15.515 2003
Session 9
12
Statement of Cash Flows
What events affect cash flow from operations and net income
equally?
What events affect cash flow from operations but NOT net
income?
What events affect net income but NOT cash flow from
operations?
15.515 2003
Session 9
13
14 15.515 2003
Session 9
+/- Cash from Investing
+/- Cash from Financing
= Ending Cash
+/- Cash from Investing
+/- Cash from Financing
= Ending Cash
Beginning Cash
+ Cash rcvd from customers
+ Interest received
- Cash paid to suppliers
- Cash paid to employees
- Interest paid
+/- other adjustments
= Cash from Operations
Beginning Cash
Net Income
+ Increase in payables
- Increase in receivables
+/- other adjustments
= Cash from Operations
Direct
Indirect
Statement of Cash Flows
Statement of Cash Flows
Balance sheet equation: Differences:
A(t) = L(t) + E(t) => A = L + E
Decompose:
Cash + CA + NCA = CL + NCL + CC + OE + RE
Note that RE = NI - Div, thus after rearranging,
Cash = NI - CA + CL - NCA + NCL + OE + CC -Div
Accounts we know:
Cash = NI - netAR - Inventory - OCA + CL -netPPE
- ONCA + NCL + OE + CC - Div
15.515 2003
Session 9
15
Statement of Cash Flows
Cash = Cash
operations
+ Cash
investing
+ Cash
financing
Cash
operations
= NI + DepExp - netAR - Inventory -OCA
+ CL - Gain(Loss)
Cash
investing
= -netPPE + Gain(Loss) -DepExp -ONCA+OE
= - Acquisitions + Disposals - ONCA+OE
Cash
financing
= + NCL + CC - Div
15.515 2003
Session 9
16
Rules of Significant Noncash Transactions
Some transactions are omitted from the SCF but disclosed
elsewhere (such as at the bottom of the SCF) so long as they are
material:
Acquisition of assets by assuming liabilities (including capital
lease obligations) or by issuing equity securities
Exchanges of non-monetary assets
Refinancing of long-term debt
Conversion of debt or preferred stock to common stock
Issuance of equity securities to retire debt
15.515 2003
Session 9
17