Accounting Foundations: Statement of Cash Flows

Introduction

• The statement of cash flows

1. Overview of the Statement of Cash Flows

• Three cash flow categories: Operating, investing, financing
• Typical cash flow patterns
• Difference between net income and operating cash flow

2. Converting Income Statement Data to Cash Flow Data

• The operating cash flow matrix
• Sales and cash collected from customers
• Wage expense and cash paid to employees
• Cost of goods sold and cash paid to suppliers
• Cash paid for interest, income taxes, and rent
• Depreciation expense

3. Reporting Operating Cash Flow: Direct/Indirect Methods

• Format of the direct method
• Using direct-method data: Time-series analysis
• Format of the indirect method
• Indirect method: Easier to create
• Indirect method: A wealth of insights

4. Investing and Financing Cash Flows

• Primary investing activities: Fixed asset purchases/sales
• Other investing activities: Investment securities
• Financing activities: Loans, repayments, and refinancing
• Financing activities: Share issuance, dividends, repurchases

5. Cash Flow Analysis

• Operating cash flow: Important statement of cash flows row
• Free cash flow: Other important statement of cash flows row
• Monitoring differences between net income and cash flow
• Total change in cash: Established company vs. startup

6. Real Company Examples of the Statement of Cash Flows

• General Motors: Cash flow death
• JCPenney: Zero free cash flow is not sustainable
• Tesla: Growth company, negative to positive free cash flow
• Beyond Meat: Growth company, negative free cash flow
• Apple: A cash cow

Conclusion

• What is your favorite financial statement?