Chapter 5 Statement of Cash Flows and Articulation

83 Pages·2014·2.81 MB·English

Chapter 5 Statement of Cash Flows
and Articulation
1. Important companion of the income statement
2. Three main categories of the cash flow statement:
operating, investing, and financing
3. Cash flows from operations using either the direct
or the indirect method
4. Prepare a complete statement of cash flows
5. Analysis of a firm’s financial strength from
perspective of cash flows
6. Articulation of the three primary financial
statements
7. Forecasted statement of cash flows
5-1
1. Describe the circumstances in which the
cash flow statement is a particularly important
companion of the income statement.
What Good is a Cash Flow Statement?
We need the cash flow statement because:
•
Sometimes earnings fail.
•
Everything is on one page.
•
It is used as a forecasting tool.
5-2
Sometimes Earnings Fail
The Big Loss Scenario
When a company reports large noncash
expenses such as:
- write-offs
- depreciation
- provisions for future obligations
… earnings may give a gloomier picture of
current operations than warranted.
(continued)
5-3
The Rapid Growth Scenario
•
Rapidly growing firms use large amounts of
cash to expand inventory.
•
Cash collections on the growing accounts
receivable often lag behind the need to pay
creditors.
•
Reported earnings may be positive, but
operations are actually consuming rather
than generating cash.
5-4
The Reality Check Scenario
Companies entering phases in which it is critical
that reported earnings look good, accounting
assumptions can be stretched
•
Just before making a large loan application
•
Just before the initial public offering of stock
•
Just before being bought out by another
company
•
Cash flow from operations, which is not
impacted by accrual assumptions, provides
an excellent reality check for earnings.
5-5
Everything is on One Page
•
The cash flow statement includes information
on operating, investing, and financing
activities.
•
Everything you ever wanted to know about a
company’s performance for the year is
summarized in this one statement.
(continued)
5-6
It is Used as a Forecasting Tool
A pro forma cash flow statement is a
prediction of what the actual cash flow
statement will look like in future years if the
operating, investing, and financing plans are
implemented.
5-7
2. Outline the structure of and information
reported in the three main categories of the
cash flow statement: operating, investing,
and financing
Statement of Cash Flows
A statement of cash flows explains the
change during the period in cash and
cash equivalents.
What is this?
5-8
Cash Equivalent
•
A cash equivalent is a short-term, highly
liquid investment that can be converted
easily into cash.
•
To qualify as a cash equivalent, an item
must be:
1. Readily convertible into cash
2. So near to its maturity that there is
insignificant risk of changes in value
due to changes in interest rates
5-9
Three Categories of Cash Flows
•
Operating activities include those
transactions and events that enter into the
determination of net income.
 Cash receipts from selling goods or from
providing services.
 Receipts from Interest, dividends, and
similar items.
 Payments to purchase inventory and to pay
wages, taxes, and similar expenses.
5-10