Recall when we talked about the required financial statements. Well, we've done a lot of work, and now we're ready to talk about the statement of cash flows. Here is an example of the statement of cash flows taken from PepsiCo's annual report to shareholders. The statement here is quite long. It even goes over to the second page. Now, if you've never seen a statement of cash flow, not to worry. We're going to go through this statement together. The statement of cash flows shows the sources and uses of cash over a period of time. The statement, generally speaking, has three sections. The first section shows cash flows from operating activities. These are cash inflows and outflows that are related to the normal business activities of the company. Some examples might include cash collection from customers or cash payments to suppliers. The second section shows cash flows from investing activities. These are cash inflows and outflows related to buying or selling long-lived assets. Some examples here might include the cash paid for the purchase of equipment, or for the purchase of a building. The third section shows cash flows from financing activities. These are cash in-flows and out-flows that are related to transactions with owners and creditors. Examples might include cash received from taking out a loan or cash received from issuing stock to investors. Once we know the total cash flow from operating activities and the total cash flows from investing activities. And the total cash flows from financing activities we can then sum them to get the total change in cash during the period, also called the total cash flow. Let's look at this as part of our big picture, the financial statement framework again. We have a balance sheet or a snapshot, at the beginning of the period. And we have a balance sheet or a snapshot at the end of the period, we've seen those. Both of those are cumulative in nature and include the effect of transactions on the company's financial position since the company's inception. But if we want to know something about what happened during the current period, we go to the income statement or the statement of cash flow. Now just as the income statement helped us understand the change in one of the balance sheet accounts, so does the statement of cash flows. It helps us understand the change in cash or the change in the cash balance from the beginning of the period balance sheet to the end of the period balance sheet. What types of things do you see when you look at the statement of cash flow? Well let's start with the operating activities section. We expect some cash inflows and we expect some cash outflows. Now remember in this section these are cash flows related to normal business activities. So they would include things like collections from customers or the cash out flows might include things like payments to suppliers or to employees or for other operating items. The investing activity section would include inflows related to selling PP&E, Intangible assets or investments or divesting of any businesses the company has decided to sell. Cash outflows here would include cash paid to buy PP&E, intangible assets, investments or acquiring other businesses. Okay, finally the financing activity section would include inflows related to issuing stock or bonds. Or taking out a loan, and the out flows will include payments to buy back stock or retire bonds repayments of loan principles, or payments of dividends. I want to call your attention to three things here. The receipt of dividends and interest on investments, the payment of interest on debt, And the payment of dividends. US GAAP requires that these three items be placed on the statement of cash flow in the sections as I have indicated here. IFRS, on the other hand, allows companies a choice. Under IF4S companies may place these items in either the operating, the investing or the financing activity section. But remember US GAAP requires them to be included as we've shown here. There are two methods that companies can use to prepare the statement of cash flow. One is called the direct method and the other is called the indirect method. Now these methods are identical in all respects, except the process by which we get to the cash flow from operating activities. So this part right here. Under the direct method, we directly list the cash receipts and cash disbursements. So we would essentially make a list of the cash coming in and the cash going out related to operation. Under the indirect method however, we start with net income from the income statement and we make adjustments to that number. Several different adjustments for any difference in timing between accrual accounting based entries and actual cash receipts. And cash outlays for every line item on the income statement. In the end though, both methods yield the exact same cash flow operating activities. And the exact same change in cash. In this course, we will focus on the indirect method. Under US GAAP, companies can choose to present a statement of cash flow under either the direct method or the indirect method. But, if they choose to use the direct method, then they must provide as a supplemental disclosure, a reconciliation of net income to cash flow from operating activities. Which is exactly what the operating activities, section of the statement is under the Indirect Method. Now, since companies have to provide that anyway under US GAAP. You can imagine then that almost all companies using US GAAP use the Indirect Method to present the statement of cash flow.
