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## ACCT 101: Cash Flows {data-background="../Backgrounds/title.jpg" class="header no-toc-progress" data-state="no-toc-progress"}

<!-- "reveal_plugins:..." and "chalkboard:" are handled by prep.py -->
```{r helpers, echo=FALSE, warning=FALSE}
library(knitr)
library(kableExtra)
html_df <- function(text, cols=NULL, col1=FALSE, full=F) {
  if(!length(cols)) {
    cols=colnames(text)
  }
  if(!col1) {
    kable(text,"html", col.names = cols, align = c("l",rep('c',length(cols)-1))) %>%
      kable_styling(bootstrap_options = c("striped","hover"), full_width=full)
  } else {
    kable(text,"html", col.names = cols, align = c("l",rep('c',length(cols)-1))) %>%
      kable_styling(bootstrap_options = c("striped","hover"), full_width=full) %>%
      column_spec(1,bold=T)
  }
}
```


<h3 class="date"><br>Session 9</h3>
<h2 class="author"><br>Dr. Richard M. Crowley</h2>

# Frontmatter {data-background="../Backgrounds/section.jpg" class="header"}

## Quiz 2 {data-background="../Backgrounds/studying.jpg" class="default never"}

- 7.5\% of overall grade
- 1 hour to complete
    - When finished, revise or turn in at the front
- 20 minute break after
- Class will resume after the break

## Learning objectives {data-background="../Backgrounds/default.jpg" class="default"}

<div class="left">
<img src="../Course_Diagrams/ACCT_101_course_map_9.png">
</div>
<div class="right">

Cash Flows

1. Understand why we have a Statement of Cash Flows
2. Identify cash flows from:
    - Operations
    - Investing
    - Financing
3. Identify significant non-cash activities
4. Apply the *indirect method*

</div>

# Statement of Cash Flows {data-background="../Backgrounds/section.jpg" class="header"}

## What is the SCF? {data-background="../Backgrounds/default.jpg" class="default"}

- Categorizes and presents all *cash* receipts and *cash* payments
    - Cash *inflows*: where cash came in from
    - Cash *outflows*: where cash went out to
- Describes cash changes over a period

<img src="../Diagrams/Statement_timing.png" style="max-height:300px">

## Why use an SCF? {data-background="../Backgrounds/default.jpg" class="default"}

- Helpful in assessing companies'...
    - Ability to generate future cash flows
    - Ability to pay dividends
    - Difference between net income and change in cash
    - Investing and financing activities during the period
    - Value using DCF models (finance)
- Provides information on three types of cash flows, accounting for all cash flows of the company
    - Operating activities
    - Investing activities
    - Financing activities

## SCF and the balance sheet {data-background="../Backgrounds/default.jpg" class="default"}

<img src="../Diagrams/SCF_BS.png" width="600px">

## Special cases: Interest and dividends {data-background="../Backgrounds/default.jpg" class="default"}

- IFRS, under IAS 7.31
    - *Pick any categorization*
        - Dividends paid/received can be any cash flow type
        - Interest paid/received can be any cash flow type
        - Keep it the same year-after-year
- US GAAP specifies where to put these -- follow this if you don't have a strong opinion on where to put interest and dividends
    - Inflows from dividends or interest: operating activities
    - Interest payments: operating activity
    - Dividend payments: financing activity

## Operating activities {data-background-image="../Backgrounds/Bukit_Merah.jpg" class="default"}

- Cash from standard business transactions
- Useful in:
    - Identifying *sustainable* cash flows
    - Management of current assets and current liabilities
        - I.e., working capital
    - Identifying liquidity issues
        - Important for loans!

## Operating activities {data-background-image="../Backgrounds/Bukit_Merah.jpg" class="default"}

<div class="clearfix">
<div class="left">
Inflows

- Sales
- Short term investments (selling)
- Other revenues
</div>
<div class="right">
Outflows

- Short term investments (buying)
- Business expenses
    - Paying suppliers and employees
    - Taxes
    - Maintenance expense
</div>
</div>

> Focus on changes in current assets, changes in current liabilities, and the income statement
    

## Investing activities {data-background-image="../Backgrounds/profits.jpg" class="default"}

- Cash transactions that increase or decrease long-term assets
- Useful in:
    - Identifying one-time or non-recurring cash inflows and outflows

## Investing activities {data-background-image="../Backgrounds/profits.jpg" class="default"}

<div class="clearfix">
<div class="left">
Inflows

- PP&E disposal
- Selling investments in other firms
- Collection of principal on loans made
</div>
<div class="right">
Outflows

- Purchasing PP&E
- Purchasing investments in other firms
- Making loans
</div>
</div>

> Focus on PP&E

## Financing activities {data-background-image="../Backgrounds/coins.jpg" class="default"}

- Cash-based increases and decreases in long-term liabilities and shareholders' equity
- Useful in:
    - Predicting future claims on cash
    - Identifying how a company is financed
        - Internally vs. externally

## Financing activities {data-background-image="../Backgrounds/coins.jpg" class="default"}

<div class="clearfix">
<div class="left">
Inflows

- Receiving loans
- Issuing stock
- Selling treasury shares
</div>
<div class="right">
Outflows

- Paying back loans
- Buying treasury shares

</div>
</div>

> Focus on long term liabilities and shareholders' equity

## Significant non-cash activities {data-background-image="../Backgrounds/default.jpg" class="default"}

- Includes:
    - Issuing common stock in exchange for PP&E
    - Bond conversion (Bond $\rightarrow$ equity)
    - Debt issuance for PP&E
    - PP&E exchange
- Useful in:
    - Determining other future claims on cash
    - Getting a more complete picture of financing and investments
- Reported at the bottom of SCF or in supplementary schedule

## Practice: Identifying cash flows {data-background-image="../Backgrounds/question1.jpg" class="default"}

> What type of cash flows are each of the following? [Operating/Investing/Financing/Non-cash/None]<br>If it is a cash flow, is it an inflow or outflow?

1. Reissue treasury shares for a warehouse
2. Pay off a note payable
3. Pay interest on a bond
4. Issue new shares for $10 each
5. Pay accounts payable
6. Record $10,000 depreciation on PP&E
7. Sell machinery at a loss
8. Sell land
9. Pay a dividend
10. Buy a warehouse
11. Sell goods for cash

## Answer {data-background-image="../Backgrounds/answer.jpg" class="default exclude"}

```{r , echo=FALSE, warning=FALSE}
options(knitr.table.format = "html") 
text <- data.frame(
  Activity = c("1. Reissue treasury shares for a warehouse", "2. Pay off a note payable (depends on length of the loan)", "3. Pay interest on a bond (Pick one)", "4. Issue new shares for $10 each", "5. Pay accounts payable", "6. Record $10,000 depreciation on PP&E", "7. Sell machinery at a loss", "8. Sell land", "9. Pay a dividend (pick one)", "10. Buy a warehouse", "11. Sell goods for cash"),
  Operating = c(" ","↓","↓"," ","↓","N/A"," "," ","↓"," ","↑"),
  Investing = c(" "," ","↓"," "," ","N/A","↑","↑","↓","↓"," "),
  Financing = c(" ","↓","↓","↑"," ","N/A"," "," ","↓"," "," "),
  NonCash   = c("✔"," "," "," "," ","N/A"," "," "," "," "," ")
)
html_df(text, col1=TRUE)
```

# Operating cash flows {data-background="../Backgrounds/section.jpg" class="header"}

## Operating cash flows {data-background-image="../Backgrounds/default.jpg" class="default"}

Two equivalent methods:

<div class="clearfix">
<div class="left">
Indirect method

- Backs out operating cash flow by starting with net income and adjusting out accruals
- Most commonly used
- Easiest to do
</div>
<div class="right">
Direct method

- Tracks and reports exactly where operating cash flows came from
- Preferred by IFRS
- Most useful for investors
</div>
</div>

- Both methods will get you to the same operating cash flow amount

> We will cover the direct method next week when we construct an SCF

## Indirect method {data-background-image="../Backgrounds/reference.jpg" class="default"}

1. Start with net income
2. Add back non-cash expenses (i.e., pure accruals)
    - Depreciation, depletion, amortization
    - Bond discount amortization
    - Bad debt expense, warranty expense
3. Subtract out any gains from asset sales included in net income
4. Add back any losses from asset sales included in net income
5. Subtract changes in current assets, **except cash**
6. Add changes in current liabilities

<img src="../Diagrams/OCF.png" width="700px">

## Indirect method: Calculation {data-background-image="../Backgrounds/default.jpg" class="default"}

- Steps 1 through 4 are available in the income statement
- Steps 5 and 6 can be calculated by comparing balance sheets
    - Current year versus prior year balance sheets
    - Compare change in accounts such as...
        - A/R
        - Inventory
        - Prepaid expenses
        - Accounts Payable
        - Unearned revenue

## Example: Indirect method  {data-background-image="../Backgrounds/default.jpg" class="default"}

<img src = "../Diagrams/SCF_Indirect_Example.png" width = "650px">

## Practice: Indirect method  {data-background-image="../Backgrounds/question1.jpg" class="default"}

> You find the following information in Kopi Corp's 20X9 and 20X8 financial statements.  Based on this information, what is their operating cash flow for 20X9?

<img src = "../Diagrams/SCF_Indirect_Practice.png" width = "700px">

## Solution: Indirect method  {data-background-image="../Backgrounds/answer.jpg" class="default exclude"}

<img src = "../Diagrams/SCF_Indirect_Practice_Answer.png" width = "700px">

# End matter {data-background="../Backgrounds/ending.jpg" class="header"}

## For next week {data-background="../Backgrounds/ending.jpg" class="default"}

- Do Quiz 2 on eLearn!
- Reading
    - Chapter 11 (Cash flows)
- Take a week and relax (or work on the project)
- Extra practice available
    - Cash flows eLearn quiz
- Survey on the class session at <a href="https://rmc.link/101survey9">rmc.link/101survey9</a>

## NOTES {class="never"}

- Add an actual example of calculating indirect method