If you are redistributing all or part of this book in a print format, Want to cite, share, or modify this book? This book uses theĬreative Commons Attribution-NonCommercial-ShareAlike License Furthermore, Amazon is still showing growth through its statement of cash flows it spent about $26 billion in fixed equipment and acquisitions. In fact, Amazon had net income of $19 billion in 2017. Lenders and investors interpreted Amazon’s cash flows as evidence that Amazon would be able to produce positive net income in the future. Assume that in 2018 Amazon paid almost $50 billion to purchase fixed assets and to acquire other businesses this is a signal of a company that is growing. Amazon’s accounts payable increased by $78 billion, while its inventory increased by $20 billion.Īnother reason lenders and investors were willing to fund Amazon is that investing payments are often signs of a company growing. Much of this was through delaying payment on inventories. Why would investors and lenders be willing to place money with Amazon? For one thing, despite having a net loss, Amazon produced $31 billion cash from operating activities. Yet during the same year, Amazon was able to raise a net $254 billion through financing. For example, assume in 2018 Amazon showed a loss of $124 billion and a net cash outflow of $262 billion from investing activities. Investors do not always take a negative cash flow as a negative. Cash flows related to changes in equity can be identified on the Statement of Stockholder’s Equity, and cash flows related to long-term liabilities can be identified by changes in long-term liabilities on the balance sheet. Examples of financing cash flows include cash proceeds from issuance of debt instruments such as notes or bonds payable, cash proceeds from issuance of capital stock, cash payments for dividend distributions, principal repayment or redemption of notes or bonds payable, or purchase of treasury stock. They can be identified from changes in long-term liabilities and equity. Cash Flows from Financing ActivitiesĬash flows from financing activities are cash transactions related to the business raising money from debt or stock, or repaying that debt. Some examples of investing cash flows are payments for the purchase of land, buildings, equipment, and other investment assets and cash receipts from the sale of land, buildings, equipment, and other investment assets. They can usually be identified from changes in the Fixed Assets section of the long-term assets section of the balance sheet. Cash Flows from Investing ActivitiesĬash flows from investing activities are cash business transactions related to a business’ investments in long-term assets. Operating cash flows also include cash flows from interest and dividend revenue interest expense, and income tax. For example, operating cash flows include cash sources from sales and cash used to purchase inventory and to pay for operating expenses such as salaries and utilities. Cash Flows from Operating ActivitiesĬash flows from operating activities arise from the activities a business uses to produce net income. As their manager, would you treat the accountants’ error as a harmless misclassification, or as a major blunder on their part? Explain. Free cash flow is calculated as cash flow from operating activities, reduced by capital expenditures, the value for which is normally obtained from the investing section of the statement of cash flows. T-Shirt Pros’ statement of cash flows, as it was prepared by the company accountants, reported the following for the period, and had no other capital expenditures.īecause of the misplacement of the transaction, the calculation of free cash flow by outside analysts could be affected significantly. This noncash investing and financing transaction was inadvertently included in both the financing section as a source of cash, and the investing section as a use of cash. The company’s policy is to report noncash investing and financing activities in a separate statement, after the presentation of the statement of cash flows. During this period, the company had purchased a warehouse building, in exchange for a $200,000 note payable. While reviewing the financial statements that were prepared by company accountants, you discover an error. Classification of Cash Flows Makes a DifferenceĪssume you are the chief financial officer of T-Shirt Pros, a small business that makes custom-printed T-shirts.
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