3.1.4. Cash Flow Statement

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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 from investing 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
€ million2009 2008
Cash and cash equivalents at beginning of period (excluding time deposit investments)9,443 9,914
Profit before tax1,261 6,608
Income taxes paid–529 –2,075
Depreciation and amortization of property, plant and equipment, intangible assets and investment property5,028 5,198
Amortization of capitalized development costs1,586 1,392
Impairment losses on equity investments16 32
Depreciation of leasing and rental assets2,247 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/income727 765
Change in inventories4,155 –3,056
Change in receivables (excluding financial services)465 –1,333
Change in liabilities (excluding financial liabilities)260 815
Change in provisions1,660 509
Change in leasing and rental assets–2,571 –2,734
Change in financial services receivables–719 –5,053
Cash flows from operating activities12,741 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 investments1,320 1
Proceeds from disposal of property, plant and equipment, intangible assets and investment property153 95
Change in investments in securities989 2,041
Change in loans and time deposit investments–236 –1,611
Cash flows from investing activities–9,675 –11,183
Capital contributions4 218
Dividends paid–874 –722
Capital transactions with minority interests–392 –362
Other changes23 –3
Proceeds from issue of bonds15,593 7,671
Repayment of bonds–10,202 –8,470
Change in other financial liabilities1,405 9,806
Finance lease payments–23 –15
Cash flows from financing activities5,536 8,123
Effect of exchange rate changes on cash and cash equivalents190 –113
Net change in cash and cash equivalents8,792 –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 liquidity25,547 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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