Cash Flow Statement Overview

Study Notes

Change in cash for the period is found on the comparative balance sheet
The difference between the beginning and end of cash on the balance sheet reflects the change in cash

The indirect method is used to prepare the statement of cash flows
Direct method is an alternative
The direct method does not require a reconciliation of net income to net cash provided by operating activities

Material financing and investing activities that do not affect cash include the issuance of common stock for property, plant, and equipment (PPE), issuance of debt to purchase PPE, and conversion of bonds into common stock
Examples:
- Purchasing land with a down payment and a note. The portion of the purchase price that is reflected in the note does not affect cash

Information about non-cash financing and investing activities is disclosed at the bottom of the statement of cash flows or in the notes to the financial statements

Current cash debt coverage ratio (ON EXAM): Net cash provided by operating activities divided by average current liabilities
- Indicates a company's ability to repay its liabilities from net cash provided by operating activities without having to liquidate the assets employed in its operations
- Whether the company can pay off its current liabilities from its operations in a given year
Cash debt coverage ratio: Net cash provided by operating activities divided by average total liabilities
- Indicates that the company can meet all of its current obligations from internally generated cash flow
Free cash flow: Net cash provided by operating activities minus capital expenditures minus cash dividends
- Indicates available funds after capital purchases and payments of cash dividends

Provides information about the cash inflows and outflows of an entity during a period

Represents the change in cash over the period, which is determined by comparing the beginning and ending cash balances on the comparative balance sheet.

There are two methods to calculate cash flows from financing activities:
- Indirect Method
- Direct Method

Issuance of common stock to acquire Property, Plant, and Equipment (PPE)
Issuance of debt to purchase PPE
Conversion of bonds into common stock
When purchasing land with a down payment and note payable, the portion financed by the note does not affect cash flow this period.
This information is typically presented at the bottom of the statement of cash flows or within the notes of the financial statement.

Current Cash Debt Coverage:
- Formula: Net cash provided by operating activities / Average current liabilities
- Indicates a company's ability to repay current liabilities using cash generated from operations.
- This ratio suggests whether a company can meet its current obligations from its operating activities within a year.
Cash Debt Coverage:
- Formula: Net cash provided by operating activities / Average total liabilities
- Indicates a company's ability to repay all its liabilities using internally generated cash flow.
Free Cash Flow:
- Formula: Net cash provided by operating activities - capital expenditures - cash dividends
- Measures the funds available for capital purchases and dividend payments after accounting for operating activities, investing activities, and financing activities.