IA Cash Flows Statement

žWhy Cash Flow Statement?

žShareholder value is now widely accepted as an appropriate standard for performance in US business. The stock market sends a clear message that earning per share is not the most important measure. Now is growth for growth’s sake. What matters is long-term cash generation. (Werner & LeBer, “Managing for Shareholder Value--From Top to Bottom,” Harvard Busines Review, Nov.-Dec. 1989 pp. 52-65.)

ž

Basic Form of Cash Flow Statement

• žCash Flow From Operating Activities
• Direct method or indirect method (direct requires also a reconciliation of net income to cash flow from operating activities)
• žCash Flow from investing activities
• žCash Flow from financing activities
• žTotal (positive or negative) cash flow is added to beginning cash balance and should result in ending cash balance

ž

Flow from Operating Activities

žIncludes:

• Current assets
• –except Marketable securities and s-term notes receivable which are investing
• Current Liabilities
• –except s-t notes payable which are financing
• Revenue and Expenses (includes interest expense and revenue, and dividends received)

žFlow from Investing Activities

žIncludes:

• Short-term and long-term investments
• Short-term and long term notes receivable
• Property, Plant and Equipment (depreciation affects operating activities)
• Intangible Assets

ž

Flow from Financing Activities

žIncludes:

• Short-term and long-term loans
• Capital Stock and Paid in Capital in excess of par
• Retained earnings (net income aspect is operating)
• Dividends Paid

ž

General Theory

žTake revenue or expense account (includes cash and accrual)

žadjust out accrual amounts

žResult is net cash in or out.

žToo expensive to classify all cash transactions into operating, financing, investing activities. Cheaper to use accrual systems and adjust out accrual information

žOperating Activities

I