Chapter 13 - Chapter 13 Classifications of the statement of...

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Chapter 13 Classifications of the statement of cash flows Explains how the amount of cash on the balance sheet at the beginning of the period became the amount of cash reported at the end of the period Cash Equivalent: a short-term, highly liquid investment with an original maturity of less than three months o Readily convertible to known amounts of cash o So near to maturity there is little risk that their value will change if interest rates change Examples are treasury bills, money market funds, commercial paper, Reports cash inflows and outflows of 3 broad categories: operating activities, investing activities, and financing activities Cash flow from operating activities: cash inflows and outflows directly related to earnings from normal operations The direct method reports the components of cash flows from operating activities as gross receipts and gross payments inflows Outflows Cash received from Customers Dividends and interest on investments Cash paid for Purchases of goods for resale and services (electricity,etc) Salaries and wages Income taxes Interest on liabilities Net cash inflow (outflow): the difference between the inflows and outflows The Direct Method: of presenting the operating activities section of the cash flow statement adjusts net income to compute cash flows from operating activities Starts with net income and then eliminates noncash items to arrive at net cash inflow (outflow) from operating activities net income +/- adjustments for non cash items
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Net cash inflow (outflow) from operating activities The total amount of cash flows from operating activities is always the same regardless of whether it is computed using direct or indirect method Indirect is used more often than direct Cash Flows from Investing Activities Cash flows from Investing Activities: are cash inflows and outflows related to the acquisition or sale of productive facilities and investments in the securities of other companies cash inflows and outflows related to the purchase and disposal of long-lived productive assets and investments in the securities of other companies. Inflows Outflows Cash received from Sale or disposal of property, plant, and equipment Sale or maturity of investments in securities Cash paid for Purchase of property, plant, and equipment Purchase of investments in securities Net cash inflow (outflow) from investing activities: the difference between these cash inflows and outflows Cash Flows from Financing Activities: are cash inflows and outflows related to external source of financing (owners and creditors) for the enterprise Inflows Outflows Cash received from Borrowing on notes, mortgages, bonds, etc. from creditors Issuing stock to owners Cash paid for Repayment of principal to creditors (excluding interest, which is an operating activity) Repurchasing stock from owners Dividends to owners Net cash inflow (outflow) from financing activities: difference between these cash inflows and outflows Net increase (decrease) in cash
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Chapter 13 - Chapter 13 Classifications of the statement of...

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