Page 644 - Accounting Principles (A Business Perspective)

16. Analysis using the statement of cash flows

operating activities, and the proceeds from sales and purchases of available-for-sale and held-to-maturity securities
must be shown as cash flows from investing activities.
Financing activities The company paid off some old debt (USD 1,397.5 million) and incurred new debt (USD

1,292.9 million). Recently many companies are substituting new debt with a low interest rate for old debt with a
high interest rate, just as homeowners refinance their homes to lower their interest rate.
The "proceeds from outside investors" resulted from the other participants in the formation of certain
businesses in which the company holds more than a 50 per cent share.
"Dividends paid" is an item that should be familiar to you. Dividends paid increased each year for the period
2008 through 2010.
The company bought back some of its own stock (treasury stock). Companies often buy back their own shares

because they (1) need the shares to issue to employees or officers under stock option plans, (2) want to bolster the
market price of the stock, or (3) hope to later sell the stock at a substantially higher price.
"Proceeds from exercise of stock options and other, net" represents the proceeds received from employees and
officers who exercised their stock options. Stock options are usually granted to employees to encourage them to
work efficiently to increase profitability, which should increase the market price of the stock. Stock options made
available to officers are for the same purpose or to attract or retain a talented executive. Normally, an option gives
the recipient the right to buy a certain number of shares at a stated price within a given time frame. For instance,
the president of a company may be granted an option to buy 10,000 shares at USD 40 per share any time after two
years from that date and before six years from that date. Assume that the current market price is USD 38. If the

market price of the stock rises to USD 80 at some time during the option period, the president could buy the shares
at USD 40 and then hold them or sell them at the higher market price. Executives of companies have become
multimillionaires by exercising their stock options. The employees and executives of Synotech, Inc., paid the
company between USD 22.2 million and USD 36.8 million per year to exercise their stock options during the three-
year period. The company re-issued some of its treasury stock as a result of the exercise of the stock options.
We will discuss some examples of the ways that the information in the statement of cash flows can be used by
management, stockholders, and creditors to make decisions. Each of these parties would use more than the

statement of cash flows to perform an analysis of the company's performance, but we will restrict ourselves to the
statement of cash flows. The next chapter shows a more complete analysis of the company's performance.
Management Management is the first to see the information contained in the statement of cash flows. You
have already read portions of "Management's Discussion and Analysis" concerning the information contained in
that statement. Management concluded that the amount of internally generated cash flows (net cash provided by
operations) appears adequate to support currently planned business operations, acquisitions, and capital
expenditures. Thus, unless the company engages in a significant acquisition it will not have to sell more stock or
borrow more funds in the foreseeable future. Also, the company apparently replaced some of its high interest rate
debt (USD 1,397.5 million) with lower interest rate debt (USD 1,292.9 million). Many companies are doing this

same thing recently to take advantage of the low interest rates available.
Stockholders Stockholders can see that dividend payments (USD 355.5 million) are comfortably covered by
net cash provided by operations (USD 1,101.0 million). Stockholders are undoubtedly pleased that the per share
dividend rate has increased each year during 2008 through 2010. The company continues to invest in its future by
making capital expenditures (USD 550.8 million) to modernize its productive facilities. The repurchase of its own

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