Business Finance –ACC501 VU

LESSON 7
THE STATEMENT OF CASH FLOWS

· There is an official accounting statement called the statement of cash flows.

· This helps explain the change in accounting cash,
· The three components of the statement of cash flows are
o Cash flow from operating activities
o Cash flow from investing activities
o Cash flow from financing activities

The Balance Sheet of the XYZ Corporation

XYZ CORPORATION
Balance Sheet
20X2 and 20X1
(in $ millions)
Assets 20X2 20X1
Current assets:
Cash and equivalents $140 $107
Accounts receivable 294 270
Inventories 269 280
Other 58 50
Total current assets $761 $707
Fixed assets:
Property, plant, and equipment $1423 $1274
Less accumulated depreciation - 550 - 460
Net property, plant, and equipment 873 814
Intangible assets and other 245 221
Total fixed assets $1,118 $1,035
Total assets $1,879 $1,742

XYZ CORPORATION
Balance Sheet
20X2 and 20X1
(in $ millions)
Liabilities (Debt) and
20X2 20X1
Stockholder's Equity
Current Liabilities:
Accounts payable $213 $197
Notes payable 50 53
Accrued expenses 223 205
Total current liabilities $486 $455
Long-term liabilities:
Deferred taxes $117 $104
Long-term debt 471 458
Total long-term liabilities $588 $562
Stockholder's equity:
Preferred stock $39 $39
Common stock ($1 per value) 55 32
Capital surplus 347 327
Accumulated retained earnings 390 347
Less treasury stock -26 -20
Total equity $805 $725
Total liabilities and stockholder's equity $1,879 $1,742

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Business Finance –ACC501 VU
Notes:
1. Long-term debt rose by ($471 million–$458 million) $13 million. This is the difference between $86 million new debt
and $73 million in retirement of old debt.

2. Treasury stock rose by $6 million. This reflects the repurchase of $6 million stock.
3. XYZ Corporation reports $43 million in new equity. The company issued 23 million shares at a price of $1.87. The
par value of common stock is increased by $23 million and capital surplus is increased by $20 million.

Income Statement of XYZ Corporation

XYZ CORPORATION
Income Statement
20X2
(in $ millions)
Total operating revenues $2,262
Cost of goods sold -1655
Selling, general, and administrative expenses -327
Depreciation -90
Operating income $190
Other income 29
Earnings before interest and taxes $219
Interest expense -49
Pretax income $170
Taxes -84
Current: $71
Deferred: $13
Net income $86
Retained earnings: $43
Dividends: $43

Notes:
1. There are 29 million shares outstanding. Earnings per share and dividends per share can be calculated as follows:
ே௘௧ூ௡௖௢௠௘
Earnings per share =
்௢௧௔௟௦௛௔௥௘௢௨௧௦௧௔௡ௗ௜௡௚

଼̈́଺
Earnings per share =
̈́ଶଽ

Earnings per share = $ 2.97 per share

஽௜௩௜ௗ௘௡ௗ
Dividend per share =
்௢௧௔௟௦௛௔௥௘௢௨௧௦௧௔௡ௗ௜௡௚

̈́ସଷ
Dividend per share =
̈́ଶଽ

Dividend per share = $ 1.48 per share

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Business Finance –ACC501 VU
Cash Flow from Operating Activities of XYZ Corporation

XYZ CORPORATION
Cash Flow from Operating Activities
20X2
(in $ millions)
To calculate cash flow from Operations Net Income $86
Depreciation 90
operations, start with net income, add
Deferred Taxes 13
back noncash items like depreciation Changes in Assets and Liabilities
and adjust for changes in current Accounts Receivable (24)
assets and liabilities (other than cash). Inventories 11
Accounts Payable 16
Accrued Expenses 18
Notes Payable (3)
Other (8)
Total Cash Flow from Operations $199

Cash Flow from Investing Activities of XYZ Corporation

XYZ CORPORATION
Cash Flow from Investing Activities
Cash flow from investing activities 20X2
involves changes in capital assets: (in $ millions)
Acquisition of fixed assets $(198)
acquisition of fixed assets and sales
Sales of fixed assets 25
of fixed assets (i.e. net capital Total Cash Flow from Investing
expenditures). $(173)
Activities

Cash Flow from Financing Activities of XYZ Corporation

XYZ CORPORATION
Cash Flow from Financing Activities
20X2
(in $ millions)
Cash flows to and from Retirement of debt (includes notes) $(73)
Proceeds from long-term debt sales 86
creditors and owners include
Dividends (43)
changes in equity and debt. Repurchase of stock (6)
Proceeds from new stock issue 43
Total Cash Flow from Financing
$7
Activities

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Business Finance –ACC501 VU
Cash Flow Statement of XYZ Corporation

XYZ CORPORATION
Statement of Cash Flows
20X2
(in $ millions)
The statement of cash flows is Operations
the addition of cash flows from Net Income $86
operations, cash flows from Depreciation 90
investing activities, and cash Deferred Taxes 13
flows from financing activities. Changes in Assets and Liabilities
Accounts Receivable (24)
Inventories 11
Accounts Payable 16
Accrued Expenses 18
Notes Payable (3)
Other (8)
Total Cash Flow from Operations $199
Investing Activities
Acquisition of fixed assets $(198)
Sales of fixed assets 25
Total Cash Flow from Investing Activities $(173)
Financing Activities
Retirement of debt (includes notes) $(73)
Proceeds from long-term debt sales 86
Dividends (43)
Repurchase of stock (6)
Proceeds from new stock issue 43
Total Cash Flow from Financing $7
Change in Cash (on the balance sheet) $33

Significance of Financial Statements

· A good Working Knowledge of financial Statements is desirable simply because these

statements are the primary means of communicating financial information both within and
outside the firm

External Uses of Statement Analysis

· Trade Creditors -- Focus on the liquidity of the firm.

· Bondholders -- Focus on the long-term cash flow of the firm.
· Shareholders -- Focus on the profitability and long-term health of the firm.

Internal Uses of Statement Analysis

· Plan -- Focus on assessing the current financial position and evaluating potential firm
opportunities.

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Business Finance –ACC501 VU
· Control -- Focus on return on investment for various assets and asset efficiency.
· Understand -- Focus on understanding how suppliers of funds analyze the firm.

Significance of Financial Statements

· The reason, we rely on accounting figures for much of our financial information is that we are
almost always unable to obtain all of market information we want.
· The only meaningful yardstick for evaluation business decisions is whether or not they create
economic value.
· Clearly, one important goal of the accountant is to report financial information to the user in a
form useful for decision making.
· But the financial statements don’t come with a user’s guide.
· We will try to fill up this gap through learning a comprehensive analysis of financial statements.

Standardized Financial Statements

· One obvious thing we want to do with a company’s financial statements is to compare them to
those of other.
· It is almost impossible to directly compare the financial statements for two companies because
of differences in size. So we will try to standardize the financial statements.

Common-Size Statements

· One very common and useful way of standardized comparison is to work with percentages
instead of dollars.
· So, a standardized financial statement presenting all items in percentages is called a common-
size statement.
· Balance sheet items are shown as a percentage of total assets and income statement items as a
percentage of sales.

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