On the statement, cash flows are segregated based on source:
Operating activities: involve the cash effects of transactions that enter into the determination of net income.
Investing activities: concern with buying (and selling) property, plants, and equipment (PPE); acquiring and disposing of securities of other entities;
Financing activities: include issuance and reacquisition of a firm's debt and capital stock, and dividend payments.
• Operating cash flows information indicates the business' ability to generate sufficient cash from its continuing operations
• Investing cash flows information indicates how the business plans to expand Information about financing cash flows illustrates how the business plans to finance its expansion/reward shareholders.
Cash Flows - 1
Cash from operations: The statement of cash flows typically arrives at cash from operations by adding to (or subtracting from) net income two types of adjustments:
1. “Non-cash” expenses’
2. Changes in operating (working capital)
e.g.:
Net Income
Non Cash Expenses:
e.g. Depreciation
Change in operating accounts:
Decrease in inventory
Cash from operations
$30,000
5,000
$35,000
15,000
$50,000
The format illustrated above follows the indirect method of presentation.
For analytical purposes, (as we shall see), the direct method is more useful; Cash Flows - 2
5.[Cash flow, transactional analysis; 1990 CFA adapted] The following financial statements are from the 19X2 Annual Report of the Niagara Company:
Prepare a statement of cash flows for the year ended December 31, 19X2.
Use the direct method.
19X1
Income Statement for Year Ended December 31, 19X2
Sales
$1,000
Cost of goods sold
(650)
Depreciation expense
(100)
Sales and general expense (100)
Interest expense
(50)
Income tax expense
(40)
Net income
$60
