Chapter 12

Chapter 12 - Chapter 12- statement of cash flows Basic...

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Chapter 12- statement of cash flows Basic concepts: the statement of cash flows Statement of cash flows - reports cash flows, cash receipts and payments, in other words, where cash come from and how it was spent. It is dated “year/month ended December ____” 1) It predicts future cash flows 2) It evaluates management decisions- reports how managers got cash and how it was used to run business 3) It determines the ability to pay dividends and interest- stockholders want dividends, creditors want interest and principal 4) Shows relationship of net income to cash flows- high NI = increase in cash and VV *cash includes cash equivalents which are highly liquid short term investments that can be converted to cash immediately, like money market accounts and investments in government securities How’s your cash flow? Telltale signs of financial difficulty Company needs NI and strong cash flow, normally move together but sometimes do not (ex. Not high enough sales in receivable ratio, inventory turnover, etc) Operating, investing and financing activities These are the three basic types of business activities: 1) Operating activities - creates revenue, expenses, gains and losses – net income, product of accrual basis accounting, most important of 3 categories b/c reflect core of company, a successful business must generate most of its cash from operating activities a. Current assets and liabilities 2) Investing activities- increase and decrease long term assets , purchase and sale of these a. Long term assets 3) Financing activities- obtain cash from investors and creditors, issuing stock, borrowing money, buying and selling treasury stock, paying cash dividends, paying off loans, relate to long term liabilities and owners equity , least important a. Long term liabilities and owners equity Two formats for operating activities 1) Indirect method- reconciles from net income to net cash provided by operating methods 2) Direct method- reports all cash receipts and payments from operating activities *compute differently, same result, do not affect investing or financing Preparing the Statement of Cash Flows: indirect method 1) Lay out template (pg 625) 2) Use b/s to determine increase or decrease in cash during period, change in cash is the check figure for the statement of cash flows 3) From the i/s take NI, depreciation, depletion, and amortization expense, gains and losses on sale of long term investments 4) Use i/s and b/s data to prepare statement, complete only after u explain year to year data changes in b/s accounts Operating activities: positive items NI, depreciation/amortization, loss on sale of long term assets, decrease in current assets other than cash, increases in current liabilities Negative items o Net loss, gain on sale of long term assets, increase in current assets other than cash, decrease in current liabilities Investing activities Cash receipts- positive o Sale of plant assets, sale of investments not cash equivalents, collections of loans receivable
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Chapter 12 - Chapter 12- statement of cash flows Basic...

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