SM_CH05-1 - CHAPTER 5 5-1 No. All public companies report...

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CHAPTER 5 5-1 No. All public companies report it because the statement of cash flows is a required statement with a required format. 5-2 A cash flow statement shows the sources of changes in cash balances and: a) aids in predicting future cash flows and evaluating how management's decisions generate and use of cash; b) aids in determining a company's ability to pay dividends and interest and to pay debts when due; c) aids in understanding and identifying changes in the mix of productive assets. 5-3 Cash equivalents are highly-liquid, short-term investments that can be converted easily to cash with little delay. Examples include money market funds and treasury bills. 5-4 Operating activities, investing activities, and financing activities are the three major types of activities summarized in the statement of cash flows. 5-5 Major operating activities include: Collections Payments from customers (for sales) to suppliers (for inventory) from investees (interest & dividends) to employees (for wages) to creditors (interest) to government (taxes) 1
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5-6 Major investing activities include: a) sales and purchases of property, b) sales and purchases of securities that are long-term investments, c) making and collecting long-term loans . 5-7 Major financing activities include: borrowing from (nontrade) creditors, repaying (nontrade) creditors, issuing equity securities, d) repurchasing equity securities, and e) paying dividends. 5-8 Interest paid or received appears in the operating activities section. Some commentators favor showing interest paid elsewhere since it is associated with financing. 5-9 Only increasing long-term debt increases cash. Both repurchasing common shares and paying dividends decrease cash. 5-10 Selling fixed assets for cash and collecting a loan increase cash. Purchasing equipment decreases cash. Purchasing fixed assets by issuing debt does not affect cash, but it should be shown in a schedule of noncash investing and financing activities that is part of the statement of cash flows. 5-11 When liabilities increase, the firm has either raised cash and promised to pay it back later or it has preserved cash rather than paying it out to reduce growing accounts payable. So more liabilities lead to more cash. Likewise, increases in noncash assets require cash. Either cash is spent to get the asset or an asset is recorded instead of receiving cash. 2
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5-12 Noncash investing and financing activities generally could have been accomplished identically in substance (though not in form) by cash transactions. For example, issuing debt to purchase an asset could have been accomplished by issuing debt for cash and then using the cash to purchase the asset. Companies should not be able to prevent disclosure of such a transaction to readers of the statement of cash flows simply by using a noncash form of transaction. 5-13 This transaction should not be shown in the body of the statement of cash flows because it involves no cash flows. However, it should be reported in an accompanying schedule. Why?
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This note was uploaded on 04/13/2008 for the course ACCT 151 taught by Professor Largay during the Spring '07 term at Lehigh University .

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SM_CH05-1 - CHAPTER 5 5-1 No. All public companies report...

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