Chapter 13 Statement of Cash Flows 583transaction does not have a direct effect on cash.
However, the transaction does eliminate the need
for future cash payments to pay interest and retire
the bonds. Thus, because of their future effect on
cash flows, such transactions should be reported to
readers of the financial statements.
When noncash investing and financing transac-
tions occur during a period, their effect is reported
in a separate schedule. This schedule usually ap-
pears at the bottom of the statement of cash flows.
For example, in such a schedule, Procter & Gamble
Inc., disclosed the issuance of $55 billion in common
stock for Gillette Co.Other examples of noncash in-
vesting and financing transactions include acquiring
fixed assets by issuing bonds or capital stock and is-
suing common stock in exchange for convertible preferred stock.No Cash Flow per Share
The term cash flow per shareis sometimes reported in the financial press. Often, the term
is used to mean “cash flow from operations per share.” Such reporting may be mis-
leading to users of the financial statements. For example, users might interpret cash
flow per share as the amount available for dividends. This would not be the case if
most of the cash generated by operations is required for repaying loans or for rein-
vesting in the business. Users might also think that cash flow per share is equivalent
or perhaps superior to earnings per share. For these reasons, the financial statements,
including the statement of cash flows, should not report cash flow per share.What Is the RealCash Flow?
The Securities and Exchange Commission disagreed with a
cash flow disclosure from a complex natural gas trading
arrangement of Dynegy Inc., a major energy provider and
trader. As a result, the company was required to remove $300
million from cash flow from operations (a drop of 37%) and
put it into the financing section. Although this change did not
impact net cash flow from all sources, it did change the inter-
pretation of cash flows. As quoted by one source, “The
restatement is a big blow to the many investors who held onto
the cash flow statement as a beacon of truth even as their faith
in the earnings figure was shattered in recent months....”
Dynegy’s share price dropped 67% within two months of this
announcement.Source:Henny Sender, “‘Reliable’ Cash Flow Has Shortcomings—Sums
Aren’t Always What They Seem.” The Wall Street Journal, May 9, 2002.INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS
Dell Direct®
HOW BUSINESSES MAKE MONEY
Dell Inc.invented the direct to consumer model for
the computer industry. This model uses an assemble-
to-order (ATO) manufacturing process, rather than a
build-to-stock (BTS) process. Under ATO, the com-
puter is not built until an order is received. Thus, no
finished inventory is produced prior to an order be-
ing received. Dell is able to reduce inventory in-
vestment and obsolescence losses while eliminating
retailer costs and margin. The ATO model requires
Dell to assemble and ship the order quickly, often
within days of an Internet order being received.
This is accomplished by positioning computer com-
ponents near the assembly location. The ATO model
allows customers to receive a custom computer di-
rectly to their location, at prices often less than shelf
product. The only downside is that the consumer
must wait a few days for delivery. The direct model
is so attractive that other industries are considering
it, such as automobiles, home appliances, and con-
sumer electronics.© DIGITAL VISION/PHOTODISC/GETTY IMAGES