statement of cashflows.ppt

1、STATEMENTS OF CASH FLOWS,Why we need to prepare a cash flow statement ?,The three key financial statements: Income statement, Balance sheet, Cash flow statements The cash flow statement is intended to 1.provide information on a firms liquidity and solvency and its ability to change cash flows in fut

2、ure circumstances 2.provide additional information for evaluating changes in assets, liabilities and equity 3.improve the comparability of different firms operating performance by eliminating the effects of different accounting methods 4.indicate the amount, timing and probability of future cash flo

3、ws,Accounting convention,Accruals basis Cash basis Historical information (accounting periods) Comparability,Definitions,Cash Cash on hand and in the deposit accounts Cash equivalents Cash equivalents are assets that are readily convertible into cash, such as money market holdings, short-term govern

4、ment bonds or Treasury bills, marketable securities and commercial paper. Cash equivalents are distinguished from other investments through their short-term existence; they mature within 3 months whereas short-term investments are 12 months or less, and long-term investments are any investments that

5、 mature in excess of 12 months. Another important condition a cash equivalent needs to satisfy is that the investment should have insignificant risk of change in value; thus, common stock cannot be considered a cash equivalent, but preferred stock acquired shortly before its redemption date can be.,

6、Components,The statement of cash flows is separated into three sections: Operating activities Investing activities Financing activities,Two methods of preparing PART 1,Direct method The direct method, although less popular, is favored by many financial managers because it reports the source of cash

7、inflows and outflows directly, without the potentially confusing adjustments to net income. Instead of starting with a reported net income, the direct method analyzes the various types of operating activities and calculates the total cash flow created by each one. Before beginning the direct method,

8、 all accrual accounts must first be converted to a cash figure.,The direct method,The direct method for creating a cash flow statement reports major classes of gross cash receipts and payments. Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cas

9、h generated from operations (sum) Interest paid Income taxes paid Net cash flows from operating activities Cash flows from investing activities Cash flows from financing activities,Two methods of preparing PART 2,Indirect method Popular because of its relative simplicity, the indirect method has you

10、 start with a figure for net income (from your income statement) and helps you adjust this accrual amount for any items that do not affect cash flows. There are three basic types of adjustments: revenues and expenses that do not involve cash inflows or outflows (e.g., cost allocations such as deprec

11、iation and amortization) gains and losses on events reported in other sections of the statement of cash flows conversions of current operating assets and liabilities from the accrual to the cash basis Note: When determining the change in current assets do not include the cash and cash equivalent acc

12、ounts.,Procedures,T account processing Analyzing processing Worksheet processing,Operating activities,The cash flows from operating activities section comes first and tells you how much cash the company generated from its core business. Receipts from the sale of goods or services Receipts for the sa

13、le of loans, debt or equity instruments in a trading portfolio Interest received on loans Dividends received on equity securities Payments to suppliers for goods and services Payments to employees or on behalf of employees Interest payments,Formula for the cash flow from operating activities,Profit

14、before taxation and interests -Invest income -Interests expense +Depreciation/Amortization/Provision -Inventories -Receivables +Payables +Loss Disposal of non-current assets Deferred tax -Dividends paid -Interests paid,Investing activities,This number shows how much money the company has received (o

15、r lost) from its investing activities. It includes money that the company has made (or lost) by investing its excess cash in different investments (stocks, bonds, etc), money the company has made (or lost) from buying or selling subsidiaries, and all the money the company has spent on its physical p

16、roperty, such as plants and equipment. the acquisition (purchase) of non-current assets The proceeds (money received) from the sale of non-current assets Loans made to suppliers or received from customers Payments related to mergers and acquisitions,Financing activities Part 1,This is where the comp

17、any reports the money that it took in and paid out in order to finance its activities. In other words, it calculates how much money the company spent or received from its stocks and bonds. This includes any dividend payments that the company made to its shareholders, any money that it made by sellin

18、g new shares of stock to the public, any money it spent buying back shares of its stock from the public, any money it borrowed, and any money it used to repay money it had previously borrowed.,Financing activities Part 2,Financing activities include the inflow of cash from investors such as banks an

19、d shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement. Proceed of issuing shares Pro

20、ceeds from issuing short-term or long-term debt Payments of dividends Payments for repurchase of company shares Repayment of debt principal, including capital leases For non-profit organizations, receipts of donor-restricted cash that is limited to long-term purposes Items under the financing activities section include: Dividends paid Sale or repurchase of the companys stock Net borrowings Payment of dividend tax,The Forth Part,N