Although the income statement and balance sheet provide measures of a company’s success in terms of performance and financial position, cash flow is also vital to a company’s long-term success. Disclosing the sources and uses of cash helps creditors, investors, and other statement users evaluate the company’s liquidity, solvency, and financial flexibility. Financial flexibility is the ability of the company to react and adapt to financial adversities and opportunities. The cash flow statement classifies all cash flows of the company into three categories: operating, investing, and financing. Cash flows from operating activities are those cash flows not classified as investing or financing and generally involve the cash effects of transactions that enter into the determination of net income and, hence, comprise the day-to-day operations of the company. Cash flows frominvesting activities are those cash flows from activities associated with the acquisition and disposal of long-term assets, such as property and equipment. Cash flows from financing activities are those cash flows from activities related to obtaining or repaying capital to be used in the business. IFRS permit more flexibility than US GAAP in classifying dividend and interest receipts and payments within these categories.
Exhibit 8 presents Volkswagen’s statement of cash flows for the fiscal years ended 31 December 2009 and 2008.
Exhibit 8. Cash Flow Statement of the Volkswagen Group: 1 January to 31 December| € million | 2009 | 2008 | |
|---|---|---|---|
| Cash and cash equivalents at beginning of period (excluding time deposit investments) | 9,443 | 9,914 | |
| Profit before tax | 1,261 | 6,608 | |
| Income taxes paid | –529 | –2,075 | |
| Depreciation and amortization of property, plant and equipment, intangible assets and investment property | 5,028 | 5,198 | |
| Amortization of capitalized development costs | 1,586 | 1,392 | |
| Impairment losses on equity investments | 16 | 32 | |
| Depreciation of leasing and rental assets | 2,247 | 1,816 | |
| Gain/loss on disposal of noncurrent assets | –547 | 37 | |
| Share of profit or loss of equity-accounted investments | –298 | –219 | |
| Other noncash expense/income | 727 | 765 | |
| Change in inventories | 4,155 | –3,056 | |
| Change in receivables (excluding financial services) | 465 | –1,333 | |
| Change in liabilities (excluding financial liabilities) | 260 | 815 | |
| Change in provisions | 1,660 | 509 | |
| Change in leasing and rental assets | –2,571 | –2,734 | |
| Change in financial services receivables | –719 | –5,053 | |
| Cash flows from operating activities | 12,741 | 2,702 | |
| Investments in property, plant and equipment, intangible assets and investment property | –5,963 | –6,896 | |
| Additions to capitalized development costs | –1,948 | –2,216 | |
| Acquisition of equity investments | –3,989 | –2,597 | |
| Disposal of equity investments | 1,320 | 1 | |
| Proceeds from disposal of property, plant and equipment, intangible assets and investment property | 153 | 95 | |
| Change in investments in securities | 989 | 2,041 | |
| Change in loans and time deposit investments | –236 | –1,611 | |
| Cash flows from investing activities | –9,675 | –11,183 | |
| Capital contributions | 4 | 218 | |
| Dividends paid | –874 | –722 | |
| Capital transactions with minority interests | –392 | –362 | |
| Other changes | 23 | –3 | |
| Proceeds from issue of bonds | 15,593 | 7,671 | |
| Repayment of bonds | –10,202 | –8,470 | |
| Change in other financial liabilities | 1,405 | 9,806 | |
| Finance lease payments | –23 | –15 | |
| Cash flows from financing activities | 5,536 | 8,123 | |
| Effect of exchange rate changes on cash and cash equivalents | 190 | –113 | |
| Net change in cash and cash equivalents | 8,792 | –471 | |
| Cash and cash equivalents at end of period (excluding time deposit investments) | 18,235 | 9,443 | |
| Cash and cash equivalents at end of period (excluding time deposit investments) | 18,235 | 9,443 | |
| Securities and loans (including time deposit investments) | 7,312 | 7,875 | |
| Gross liquidity | 25,547 | 17,318 | |
| Total third-party borrowings | –77,599 | –69,555 | |
| Net liquidity | –52,052 | –52,237 | |
The operating activities section of Volkswagen’s cash flow statement begins with profit before tax,6 €1,261 million, subtracts actual income tax payments, and then adjusts this amount for the effects of non-cash transactions, accruals and deferrals, and transactions of an investing and financing nature to arrive at the amount of cash generated from operating activities of €12,741 million. This approach to reporting cash flow from operating activities is termed the indirect method. The direct method of reporting cash flows from operating activities discloses major classes of gross cash receipts and gross cash payments. Examples of such classes are cash received from customers and cash paid to suppliers and employees.
The indirect method emphasizes the different perspectives of the income statement and cash flow statement. On the income statement, income is reported when earned, not necessarily when cash is received, and expenses are reported when incurred, not necessarily when paid. The cash flow statement presents another aspect of performance: the ability of a company to generate cash flow from running its business. Ideally, for an established company, the analyst would like to see that the primary source of cash flow is from operating activities as opposed to investing or financing activities.
The sum of the net cash flows from operating, investing, and financing activities and the effect of exchange rates on cash equals the net change in cash during the fiscal year. For Volkswagen, the sum of these four items was €8,792 million in 2009, which thus increased the company’s cash, excluding amounts held in time deposit investments, from €9,443 million at the beginning of the period to €18,235 million at the end of the period. As disclosed in a note to the financial statements, the time deposit investments are €42 million and €2,304 million for the years 2008 and 2009, respectively. The note also disclosed that €11 million of cash and cash equivalents held for sale [sic] are included in the cash and cash equivalents as reported in cash flow statement but are not included in the cash and cash equivalents as reported in the balance sheet in 2008. When these amounts are included with the amounts shown on the cash flow statement, the total cash and cash equivalents for the years 2008 and 2009 are €9,474 (= 9443 + 42 – 11) million and €20,539 million. These are the same amounts reported as cash and cash equivalents on the balance sheets in Exhibit 3. The cash flow statement will be covered in more depth in a later reading.
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