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Chapter 23 The Statement of Cash —Direct Method

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Chapter 23 The Statement of Cash —Direct Method
Chapter 23
The
Statement of Cash
Flows—Direct Method
What Is the Statement of Cash Flows?
A financial statement that
explains in detail how the
balance of cash and cash
equivalents has changed
between the beginning and
the end of a fiscal period
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Questions the Statement
of Cash Flows Can Answer
• What new assets did the firm invest in during the
year?
• If liabilities increased during the year, where
were the proceeds spent?
• If liabilities decreased, how were they reduced?
• Did operations for the year generate enough
cash to pay dividends?
• If the corporation issued stock during the year,
where were the proceeds spent?
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Part of the Set
of Financial Statements
Statement of Financial Accounting
Standards No. 95
The FASB requires the statement of cash
flows to be part of a full set of financial statements.
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Cash Equivalents
• Short-term, highly liquid investments (maturing
90 days or less from the date acquired)
• Examples:
– Money market accounts
– U.S. Treasury bills
– Commercial paper (promissory notes issued by
corporations)
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Purpose of the
Statement of Cash Flows
• To provide a summary of information concerning
a company’s cash receipts and payments during
a fiscal period
• To provide information about a firm’s investing
and financing activities during a fiscal period
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Internet Research:
Cash Flows at Nike, Inc.
• Nike, Inc. is one of Skechers’ competitors in the
footwear industry.
• Use the Internet to find out what Nike’s net cash
flows were for its most recent fiscal year.
What amount was used/provided by operating
activities? By investing activities? By financing
activities?
For the fiscal year ended May 31, 2006, Nike’s net cash
flows were ($433.9) million.
Cash provided by operating activities, $1,667.9 million
Cash used by investing activities, ($1,276.6) million
Cash used by financing activities, ($850.9) million
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Performance Objective 3
State the uses of
the statement of cash
flows by management,
investors, and creditors.
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Uses of the Statement of Cash Flows
Assessing or evaluating
the liquidity of a business,
including the ability of the
business to generate
future cash flows and to
pay its debts and
dividends
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Questions That Management
Answers Using the Statement of Cash Flows
• Liquidity
– Is enough cash being generated to enable the
company to pay its bills?
• Dividend policy
– Is enough cash being generated to enable the
corporation to establish a regular dividend policy?
• Investment and financing
– If the firm borrows to buy assets, is there enough
cash being generated to make the payments
on the debt?
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Questions That Investors and Creditors
Answer Using the Statement of Cash Flows
• Investors
(stockholders) use
it to assess the
corporation’s ability
to pay dividends.
– Will the corporation
generate future cash
flows?
– Will the corporation
need additional
financing?
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• Creditors use it to
assess the
corporation’s ability
to pay its liabilities.
– Will the corporation
generate future cash
flows?
– Will the corporation
need additional
financing?
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Three Categories of Activities
• Operating activities
– Include the cash flows associated with the calculation
of net income
• Investing activities
– Include the cash flows associated with long-term
assets
• Financing activities
– Include the cash flows associated with long-term
liabilities and owner’s and stockholders’ equity
accounts
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Cash Flows Associated
with Operating Activities
Transactions that
affect the calculation of net income
Cash inflows
– Cash receipts from
customers for the
sale of merchandise
and services
– Cash receipts from
interest and
dividends
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Cash outflows
– Cash payments for
merchandise
purchases and
operating expenses
– Cash payments for
interest
– Cash payments for
income taxes
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Cash Flows Associated
with Investing Activities
Transactions that
affect long-term assets
Cash inflows
– Receipts from selling
property and
equipment
– Receipts from selling
investments other than
cash equivalents
– The collection of loans
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Cash outflows
– Expenditures to buy
property and equipment
– Expenditures to acquire
investments other than
cash equivalents
– The making of loans
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Cash Flows Associated
with Financing Activities
Transactions that affect long-term liability and
owner’s and stockholders’ equity accounts
Cash inflows
– Receipts from issuing
bonds and notes
– Receipts from issuing
stock
– Receipts from owner
investments
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Cash outflows
– Expenditures to retire
bonds or pay off notes
– Expenditures to
purchase treasury stock
– Payments of personal
withdrawals
– Payments of dividends
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Statement of Cash Flows:
Direct Method or Indirect Method
• The only difference between the direct method and the
indirect method is in the presentation
of cash flows from operating activities.
– Direct method (method used for our textbook)
• Shows the specific sources and uses of cash that
contribute to the cash flows from operating activities
• Converts each amount on the income statement from
the accrual basis to the cash basis
– Indirect method
• Starts with net income and undoes all the accrual
accounting to arrive at cash flows from operating
activities
• Relies on a comparative balance sheet to convert
accounts to a cash basis
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Statements Required to Convert Financial
Statements from an Accrual to a Cash Basis
 Balance sheet at the beginning and end of the
accounting period (comparative balance sheet)
 Income statement for the period ended
 Statement of owner’s equity for the period ended
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Steps in Preparing a Statement of
Cash Flows Using the Direct Method
• Compile a comparative balance sheet listing the
increases and decreases in all accounts.
• Convert changes in account balances to cash
flows using the calculations that follow.
• Remember: The change in cash for the year
shown on the comparative balance sheet is the
target number that should appear at the bottom
of the statement of cash flows.
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