Lecture08 - Lecture 8 Statement of Cash Flows 1 In the...

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1 Lecture 8 Statement of Cash Flows
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2 In the news… Software Maker Triples its Profit By REUTERS Published: February 1, 2008 BOSTON (Reuters) — CA Inc., the maker of business software, reported Thursday that quarterly profit more than tripled as it cut expenses and the weak dollar helped bolster revenue from overseas operations. The company posted fiscal third-quarter net income from continuing operations of $163 million , or 31 cents a share, compared with $50 million , or 9 cents, a year earlier. Revenue rose 10 percent, to $1.1 billion, during the quarter, which ended Dec. 31. The company said that total revenue would have climbed 4 percent in constant currency. North American revenue was up 5 percent in the third quarter while revenue from international operations was up 17 percent, or 4 percent on a constant currency basis, compared with the period last year. Expenses before interest and income taxes fell to $851 million, from $907 million. Cash flow from continuing operations fell 60 percent, to $233 million (was $587 million in Q3 of 2006).
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3 Goals of Today’s Class • Understand the three sections of the Statement of Cash Flow • Understand how to get from net income (on the income statement) to cash flow from operations (on the cash flow statement) • Idea of “Free Cash Flow”
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4 Business Background Positive cash flows permit a company to… Expand its operations. Expand its operations. Replace needed assets. Replace needed assets. Take advantage of market opportunities. Take advantage of market opportunities. Pay dividends to owners. Pay dividends to owners.
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5 Purpose of the Statement of Cash Flows To report about how the entire firm’s operating, investing, and financing activities have affected its cash balances during the period covered by the statement. In this context, “Cash” is defined as cash balances plus marketable securities with original maturities of three months or less. The cash flow statement should display all of the cash inflows within each of the three categories 1. Operations 2. Investing 3. Financing
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6 Net Income ($2,278.5) ≠ change in Cash ($887) Why?
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7 Differences between Change in Cash and Net Income Net Income almost never reflects the actual change in cash-on-hand Accruals change net income without changing cash For example, depreciation expense lowers net income with no related change to cash-on-hand Purchases and sales can change cash without changing net income For example, purchasing equipment for cash lowers the cash balance but it does not immediately change net income Obtaining or paying off debt can change cash without changing net income For example, obtaining a new loan will increase cash without an immediate change in net income Issuing or repurchasing equity can change cash without changing net income For example, repurchasing Treasury Stock will decrease cash without a change in net income
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8 Net Income includes a bunch of non-cash accruals that are a normal part of business
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This note was uploaded on 06/28/2009 for the course ACCT 101 taught by Professor Armstrong during the Summer '09 term at UPenn.

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Lecture08 - Lecture 8 Statement of Cash Flows 1 In the...

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