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CHAPTER 05 POWER - Chapter 5 Statement of Cash Flow Statement of Cash Flow What is the SCF-Summary of how the cash flows(inflow outflow Summarize

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Chapter 5 Statement of Cash Flow
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Statement of Cash Flow What is the SCF ? -Summary of how the cash flows (inflow & outflow) - Summarize cash flows by activities. 3 business activities 1) Operating activities 2) Investing activities 3) Financing activities
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Operating Activities Operating Activities Operations: Buy inventory, sell inventory, collect cash. Net income indicates results of operations , except it is on accrual basis. Need to convert Net Income to the cash basis. Converting to the cash basis has specific rules
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Investing Activities Excess cash invest to get a return on investments. Purchase shares in other cos. -> long term investments Purchase real estate Purchase other fixed assets equip. cars Purchase short term invest marketable securities
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Financing Activities Borrow money to expand ->Loan payable Borrow money from bank -> Bank loan Payable Issue shares-> Common shares Dividends paid
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Preparing the Statement of Cash flow 2 ways to prepare SCF 1) Direct method-suggested by GAAP 2) Indirect method-used by 99% of companies Compare a co. using both methods. Difference is in the operating activities section, everything else is the same.
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Indirect Method Operating Activities Start with Net Income ( From Income Statement) and convert NI from accrual basis to NI on cash basis. 1)Remove non cash items: + amortization + loss on sale of assets - gain on sale of assets
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Operating Activities 2 ) Remove accruals : + Decrease in CA - Increase in CA + Increase in CL - Decrease in CL
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Investing activities Investing Activities Add or subtract changes in : Long term Assets ie: Investment in other co. Fixed Assets ie: Land , building, equipment
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Financing Activities Financing Activities Add or subtract changes in: Long term liabilities ie: Mortgage payable Share Capital: Common Stock Deduct dividends paid.
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Why Do we Need SCF? Income Statement measures performance over one year. It ignores timing of sales cash collections And it ignores timing of paying cash for inventory and operating expenses. SCF Shows how much cash has come in from sales
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Why do we need SCF ? And what cash is available to pay expenses. SCF also shows if excess cash available to invest. SCF Shows if cash is available to pay loan interest and repayment needs. SCF shows us if the co. is having cash flow problems.
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HOW DO WE SOLVE CASH FLOW PROBLEMS ? HOW DO WE SOLVE CASH FLOW PROBLEMS ? 3 causes of cash flow problem High growth rate in sales Under-capitalization .Lead/lag relationship in cash flow.
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Limit growth of sales
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This note was uploaded on 08/06/2009 for the course MANAGEMENT MGCR 211 taught by Professor Zajdman during the Summer '09 term at McGill.

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CHAPTER 05 POWER - Chapter 5 Statement of Cash Flow Statement of Cash Flow What is the SCF-Summary of how the cash flows(inflow outflow Summarize

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