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Course Project

For the course project, select a company with common stock traded on a public stock exchange (NYSE, NASDAQ, London (LSE), etc.). Submit your company selection with the stock exchange listing in the project discussion board for me to approve. I would like each student to select a different company to work with for this project. Prepare a financial analysis on the company using public information such as the company’s annual report, SEC 10-Q and 10-K.

Prepare a brief presentation (5 minutes) for the  Class

CHAPTER 9

The Statement of Cash Flows

Learning Objectives

1. Identify the purposes of the statement of cash flows

2. Report cash flows from operating, investing and financing activities

3. Prepare a statement of cash flows by the direct method

4. Compute the cash effects of a wide variety of business transactions

5. Prepare a statement of cash flows by the indirect method

Outline

Objective 1: Identify the purposes of the statement of cash flows

A. The statement of cash flows reports the entity’s cash flow (cash receipts and cash payments) during the period—where the cash came from, and how it was spent.

B. The period of time covered by the statement of cash flows and the income statement is the same.

C. The purposes of the statement are:

1. to predict future cash flows,

2. to evaluate management decisions,

3. to determine the ability to pay dividends to stockholders and principal and interest to creditors, and

4. to show the relationship of net income to changes in cash.

D. Cash includes cash on hand, cash in the bank, and cash equivalents. Cash equivalents are very liquid short-term investments such as money market investments and Treasury bills.

Objective 2: Report cash flows from operating, investing, and financing activities

A. Cash flows are classified as operating, investing, or financing activities.

1. Operating activities create revenues and expenses. The statement shows the cash inflows and outflows from these activities.

a. Operating activities relate to transactions that make up net income.

b. Cash flow from operating activities is the most important source of cash for a business.

2. Investing activities are increases and decreases in assets other than those involved in operating activities. The statement shows the cash inflows and outflows from these activities.

a. Investing activities relate to long-term asset accounts.

b. Investments in fixed assets suggest a strong company.

3. Financing activities involve obtaining funds from investors and creditors. The statement shows the cash flows from these activities.

a. Financing activities relate to long-term liabilities and owners’ equity accounts.

b. Both stock transactions and debt transactions are financing activities; however, paying interest on debt is considered an operating activity (because interest expense is a part of net income), while paying dividends on stock is considered a financing activity.

B. The FASB approved two formats for reporting operating activities—the direct method and indirect method.

1. The direct method lists cash receipts from specific operating activities and cash payments for each major operating activity. The FASB prefers the direct method.

2. The indirect method begins with net income and reconciles to cash flows from operating activities. Because most companies use an accrual method, many companies find the indirect method easier to use.

3. The total for operating activities and the total change in cash is the same for both methods. The investing activities and financing activities are exactly the same for both methods.

Objective 3: Prepare a statement of cash flows by the direct method

A. Preparation of the statement of cash flows involves these steps:

1. Identify the activities that increase or decrease cash.

2. Classify each activity as operating, investing, or financing.

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