Blasted Hopes Essay

5497 words - 22 pages

Rev. November 3, 1998

Statements of Cash Flows: Three Examples
John Stacey, a sales engineer for Aldhus Corporation, was worried. A flight delay had caused
him to miss last weeks accounting class in the evening MBA program in which he had enrolled at the
suggestion of the personnel director at Aldhus, a growing manufacturer of computer peripherals. The
class he had missed had been devoted to a lecture and discussion of the statement of cash flows, and
he was sure the material he had missed would be covered in the weekly quiz that was part of each
class session. A classmate had faxed Stacey some notes distributed by their instructor, but they were
too cryptic to be ...view middle of the document...

I have prepared some questions to guide your study. Then, we can meet again tomorrow
to discuss what you have learned and to answer any questions that remain. I do not think you have to
worry about your next quiz because if you understand how balance sheets and income statements are
prepared, much about the statement of cash flows will seem pretty obvious.
John Stacey: I hope you are right. I really like the accounting course, and I want to do well in
it and to really learn the material. Thats why I panicked when I could not understand the notes our
instructor passed out last week.
Professors Julie H. Hertenstein and William J. Bruns prepared this case as the basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.
Copyright 1993 by the President and Fellows of Harvard College. To order copies or request permission to
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recording, or otherwisewithout the permission of Harvard Business School.



Statements of Cash Flows: Three Examples

Lucille Barnes: Forget those notes for a while and just concentrate on studying the
statements I have given you. Notice that the statement of cash flows is divided into three sections:
operating activities, investing activities, and financing activities. Each section shows the cash inflows
and the cash outflows associated with that type of activity.
Operating activities shows the inflows and outflows related to the fundamental operations of
the basic line or lines of business that the company is in. For example, it would include cash receipts
from the sale of goods or services and the cash outflows for purchasing inventory, and paying wages,
taxes and rent.
Investing activities shows cash flows for the purchase and sale of assets not generally held for
resale and for the making and collecting of loans. (Maybe it should more appropriately be called the
investing and disinvesting activities section.) Here is where you would see if the company sold a
building, purchased equipment, made a loan to a subsidiary, or purchased a piece of equity in its
Finally, financing activities shows the cash flows associated with increasing or decreasing the
firms financing, for example, issuing or repurchasing stock and borrowing or repaying loans. It also
includes dividends, which are cash flows associated with equity. However, ironically, it does not
include interest payments; these are included in operating activities.
John Stacey: That seems strange to me. Since loans are the reason interest payments are
made, why are they not included in the financing activities section? You know, interest...

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