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MANAGING PROJECTS

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Projects represent nonroutine business activities that often have long-term strategic ramifications for a firm. In this chapter, we examined how projects differ from routine business activities and discussed the major phases of projects. We noted how environmental changes have resulted in increased attention being paid to projects and project management over the past decade. In the second half of the chapter, we introduced some basic tools that businesses can use when planning for and controlling projects. Both Gantt charts and network diagrams give managers a visual picture of how a project is going. Network diagrams have the added advantage of showing the precedence between activities, as well as the critical path(s). We wrapped up the chapter by showing how these concepts are embedded in inexpensive yet powerful software packages such as Microsoft Project. If you want to learn more about project management, we encourage you to take a look at the Web site for the Proj...
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Reporting the Statement of Cash Flows

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CONCEPTUAL
The purpose of the statement of cash flows is to report major cash receipts and cash payments relating to operating, investing, or financing activities. Operating activities include transactions and events that determine net income. Investing activities include transactions and events that mainly affect long-term assets. Financing activities include transactions and events that mainly affect long-term liabilities and equity. Noncash investing and financing activities must be disclosed in either a note or a separate schedule to the statement of cash flows. Examples are the retirement of debt by issuing equity and the exchange of a note payable for plant assets.
ANALYTICAL
To understand and predict cash flows, users stress identification of the sources and uses of cash flows by operating, investing, and financing activities. Emphasis is on operating cash flows since they derive from continuing operations. The cash flow on total assets ratio is defined as operating cash flows divided by average total assets. Analysis of current and past values for this ratio can reflect a company’s ability to yield regular and positive cash flows. It is also viewed as a measure of earnings quality.
PROCEDURAL
Preparation of a statement of cash flows involves five steps: (1) Compute the net increase or decrease in cash; (2) compute net cash provided or used by operating activities (using either the direct or indirect method); (3) compute net cash provided or used by investing activities; (4) compute net cash provided or used by financing activities; and (5) report the beginning and ending cash balances and prove that the ending cash balance is explained by net cash flows. Noncash investing and financing  activities are also disclosed.
The indirect method for reporting net cash provided or used by operating activities starts with net income and then adjusts it for three items: (1) changes in noncash current assets and current liabilities related to operating activities, (2) revenues and expenses not providing or using cash, and (3) gains and losses from investing and financing activities.
Cash flows from both investing and financing activities are determined by identifying the cash flow effects of transactions and events affecting each balance sheet account related to these activities. All cash flows from these activities are identified when we can explain changes in these accounts from the beginning to the end of the period.
A spreadsheet is a useful tool in preparing a statement of cash flows. Six key steps (see Appendix 16A) are applied when using the spreadsheet to prepare the statement.
The direct method for reporting net cash provided or used by operating activities lists major operating cash inflows less cash outflows to yield net cash inflow or outflow from operations.
Guidance Answers to Decision Maker
Entrepreneur
Several factors might explain an increase in net cash flows when a net loss is reported, including (1) early recognition of expenses relative to revenues generated (such as research and development), (2) cash advances on long-term sales contracts not yet recognized in income, (3) issuances of debt or equity for cash to finance expansion, (4) cash sale of assets, (5) delay of cash payments, and (6) cash prepayment on sales. Analysis needs to focus on the components of both the net loss and the net cash flows and their implications for future performance.
Reporter
Your initial reaction based on the company’s $600,000 loss with a $550,000 decrease in net cash is not positive. However, closer scrutiny reveals a more positive picture of this company’s performance. Cash flow from operating activities is $650,000, computed as [?] - $850,000 - $350,000 = $(550,000). You also note that net income before the extraordinary loss is $330,000, computed as [?] - $930,000 = $(600,000).

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