13 Statement of

Cash Flows

FINANCIAL
ACCOUNTING
PowerPoint Presentation by
2ND EDITION
Gail B. Wright
Professor of Accounting
BY Bryant University

DUCHAC, REEVE, & WARREN © Copyright 2007 Thomson South-Western, a part

of The Thomson Corporation. Thomson, the Star
Logo, and South-Western are trademarks used
herein under license.

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CASH
CASH FLOW
FLOW STATEMENT
STATEMENT

•• 33 sections
sections reporting
reporting cash
cash flows
flows
from
from different
different activities
activities
–– Cash
Cash flows
flows from
from operating
operating activities
activities
–– Cash
Cash flows
flows from
from investing
investing activities
activities
–– Cash
Cash flows
flows from
from financing
financing activities
activities

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CASH
CASH FLOWS:
FLOWS: Operating
Operating Activities
Activities

• Most important cash flows of a business

• 2 methods
– Direct method
• Reports operating cash flows as sources, uses of
cash
– Indirect method
• Reports operating cash by adjusting accrual net
income to cash flows

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CASH
CASH FLOWS:
FLOWS: Investing
Investing Activities
Activities

•• Cash
Cash inflows
inflows from
from investing
investing activities
activities arise
arise
from
from
–– Selling
Selling fixed
fixed assets,
assets, investments,
investments,intangible
intangible
assets
assets
•• Cash
Cash outflows
outflows from
from investing
investing activities
activities
arise
arise from
from
–– Buying
Buying fixed
fixed assets,
assets, investments,
investments, intangible
intangible
assets
assets
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CASH
CASH FLOWS:
FLOWS: Financing
Financing Activities
Activities

•• Cash
Cash inflows
inflows from
from financing
financing activities
activities arise
arise
from
from
–– Issuing
Issuing debt,
debt, equity
equity securities
securities
•• Cash
Cash outflows
outflows from
from financing
financing activities
activities
arise
arise from
from
–– (Re)Paying
(Re)Paying dividends,
dividends, debt,
debt, purchasing
purchasing
treasury
treasury stock
stock

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EXERCISE
EXERCISE 13-3a
13-3a
Identify cash flow from operating activity.

1. Purchased patents 7. Redeemed bonds

2. Purchased buildings 8. Paid cash dividends Click
3. Purchased treasury stock 9. Sold long-term button to
skip this
4. Sold equipment investment exercise
5. Net income 10. Issued common stock
6. Issued preferred stock 11. Issued bonds

Press “Enter” or click left mouse button for answer.

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EXERCISE
EXERCISE 13-3b
13-3b
Identify cash flow from investing activity.

1. Purchased patents 7. Redeemed bonds

2. Purchased buildings 8. Paid cash dividends Click
3. Purchased treasury stock 9. Sold long-term button to
skip this
4. Sold equipment investment exercise
5. Net income 10. Issued common stock
6. Issued preferred stock 11. Issued bonds

Press “Enter” or click left mouse button for answer.

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EXERCISE
EXERCISE 13-3c
13-3c
Identify cash flow from financing activity.

1. Purchased patents 7. Redeemed bonds

2. Purchased buildings 8. Paid cash dividends Click
3. Purchased treasury stock 9. Sold long-term button to
skip this
4. Sold equipment investment exercise
5. Net income 10. Issued common stock
6. Issued preferred stock 11. Issued bonds

Press “Enter” or click left mouse button for answer.

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NONCASH
NONCASH ACTIVITIES
ACTIVITIES

• Arise from investing, financing activities

– Examples
• Issue stock to retire long-term debt
• Issue stock, debt in exchange for fixed asset
– Has no direct effect on cash flows
– Disclosed in separate schedule

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CASH
CASH FLOWS:
FLOWS: Direct
Direct Method
Method

•• Direct
Direct method
method
–– Reports
Reports operating
operating cash
cash flows
flows as
as sources,
sources, uses
uses
of
of cash
cash
–– Adjusts
Adjusts certain
certain income
income statement
statement items
items for
for
changes
changes in
in current
current assets,
assets, liabilities
liabilities

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EXHIBIT 7
Rundell, Inc. current accounts used for Operating
cash flow under direct method

Continued
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EXHIBIT 7
Rundell, Inc. income statement items used for
Operating cash flow under direct method

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DIRECT
DIRECT METHOD:
METHOD:
Cash
Cash Received
Received from
from Customers
Customers

Sales adjusted for change accounts receivable

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DIRECT
DIRECT METHOD:
METHOD:
Cash
Cash Paid
Paid for
for Inventory
Inventory

Cost of inventory adjusted for changes in

inventory & accounts payable

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DIRECT
DIRECT METHOD:
METHOD:
Cash
Cash Paid
Paid for
for Operating
Operating Expenses
Expenses

Operating expenses adjusted for changes in

accrued expenses

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DIRECT
DIRECT METHOD:
METHOD:
Cash
Cash Paid
Paid for
for Income
Income Tax
Tax

Income tax expense adjusted for changes in

taxes payable

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EXHIBIT 8

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CASH
CASH CONVERSION
CONVERSION CYCLE
CYCLE

• Cash conversion cycle

– Measures the cycle of
• Buying inventory
• Paying for inventory (account payable)
• Selling inventory
• Collecting account receivable

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CASH
CASH CONVERSION
CONVERSION CYCLE:
CYCLE:
Equation
Equation

Days’ sales in A/R = A/R / Ave daily net Sales

+
Days’ sales in inventory = Ave. Inv. / Ave CGM

-
Days’ sales in A/P = Ave. A/P / Ave CGM

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CASH
CASH CONVERSION
CONVERSION CYCLE:
CYCLE:
Calculation
Calculation

Apple Dell
# Days’ Sales
Receivables 34 30
Inventory 5 4
Accounts Payable <79> <74>
Conversion Cycle <40>
?
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ANALYSIS:
ANALYSIS: Cash
Cash Conversion
Conversion Cycle
Cycle

•• The
The more
more positive
positive the
the conversion
conversion cycle,
cycle, the
the
less
less efficient
efficient the
the operations
operations
–– Reduces
Reduces amount
amount of of noncash
noncash current
current assets
assets
–– Increases
Increases level
level of
of current
current liabilities
liabilities
–– Releases
Releases cash
cash for
for other
other purposes
purposes
•• Negative
Negative cycles
cycles indicate
indicate highly
highly efficient
efficient use
use
noncash
noncash working
working capital
capital

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 Inspiration of the Day
"To do carefully and constantly and
kindly many little things is not a little
thing"
- Author Unknown

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