Statement Of Cash Flows: Fill & Download for Free

The income statement looks something like this:As you can see, we're not doing very well. Shocking, I know.The balance sheet looks something like this:Statement of Cash FlowsThere are many supplemental financial statements available along with the accompanying footnotes to financial statements, which can be found here. http://www.gao.gov/financial/fy2011/11frusg.pdf

The short answer: because U.S. GAAP mandates it.U.S. GAAP requires bond premium amortization to be included in the operating activities section of the statement of cash flows. Under the indirect method, the amortization of bond premium is deducted from net income because it originally reduces interest expense and, thus, increases net income without an actual cash inflow.Some accountants argue that the amortization of bond premium is a consequence of the repayment of an originally incurred obligation – rather than interest – and, therefore, should be classified as a financing activity. IFRS allows (but does not require) such a classification, but U.S. GAAP requires bond premium amortization to be included as an adjustment to net income in the operating activities section of the statement of cash flows.

Take a look an Enron’s annual report for the year 2000 (http://picker.uchicago.edu/Enron/EnronAnnualReport2000.pdf). You’ll see the company reported $979 million of net earnings. Soon afterwards, the stock would hit $90 per share. The next year the company was bankrupt and the shares were worthless.Were there clues in the statement of cash flows? Well, the company did report an increase of $1,086 million in cash, so it might appear that the $979 earnings figure represented real cash profits. But the statement also showed that $571 of that cash increase came from net issuance of equity and debt. Then it showed that $8,023 million came from reduction in receivables and another $7, 167 came from increase in payables. So the actual business burned through $14,675 million of cash, which was covered up by borrowing, selling stock, collecting money it was owed faster and deferring payment on money it owed.Now that’s a misleading picture as well, Enron was a very complicated company. But it certainly merited an investor asking why the business consumed $15 billion of cash when it’s supposedly extremely profitable? Why did it need to raise so much cash capital markets? Was the $4 billion spent on capital and investments used wisely? Some of these answers could be found going through the extensive notes, but those notes raised a lot more questions as well.At the very least, the statement of cash flows should have alerted an investor that it would take a lot of work to understand this company. If someone asked you to buy an interest in her lemonade stand that made $979 yesterday and had $1,086 in cash; you’d be interested to know that she borrowed $571 of that cash, failed to pay $7,167 in bills for lemons and sugar, collected $8,023 from lemonade sold on previous days and still had only $1,086 in the till. You’d ask her where all that cash went. Or you’d walk away from the deal figuring either (a) it was a fraud or (b) it was too complicated for you to understand.