lecture9 - 1 Cash Flow Analysis 15.501/516 Accounting...

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Unformatted text preview: 1 Cash Flow Analysis 15.501/516 Accounting Spring 2004 Professor S. Roychowdhury Sloan School of Management Massachusetts Institute of Technology Mar 1/3, 2004 2 About The Exam z March 10 th – a week from today. z In class z Closed book z TAs will hold a review session. Time and place to be announced shortly. z March 8 th class: in-class exam review. 3 Statement of Cash Flows z Reports operating cash flow as well as other cash flow information. z Provides important information to investors and creditors. z In particular, information about differences in the timing of revenue and expense recognition under GAAP and the associated cash inflows and outflows. 4 Statement of Cash Flows z The cash flow statement separates changes in cash into three categories: z operating cash flow z investing cash flow z financing cash flow. z The statement sums to the actual change in cash during the year z The change equals the difference between the beginning and ending cash balances reported on the balance sheet. 5 Why focus on a cash flow statement? z Net income reported on the income statement provides an important measure of performance. z However, in the absence of cash flow, income does not pay the bills. z Interest and dividend payments, required principal reductions on debt, and capital expenditures for plant and equipment and for expansion cannot be made without cash. z Cash provided by operating activities, also known as operating cash flow, is a primary source of cash to meet these needs. 6 Why focus on a cash flow statement? z In the absence of operating cash flow, cash from other sources can be used to cover cash requirements. z For example, cash can be obtained from on-hand balances or nonrecurring asset sales, new debt or equity financing. z These non-operating sources of cash flow can be relied upon only in the short run. z In the long run, operating cash flow is the only reliable source of cash available to meet recurring needs. 7 1. Joe’s Landscaping Service Joe contributes $10,000 in cash z Assets = Liabilities + Owners’ Equity z Cash Contributed Capital z +$10,000 +$10,000 Journal Entry Dr Cash 10,000 Cr Contributed capital 10,000 8 2. The company borrows $3,000 from the bank z Assets = Liabilities + Owners’ Equity z Cash Loans Payable z +$3,000 +$3,000 Journal Entry Dr Cash 3,000 Cr Loans payable 3,000 9 3. Company purchases equipment for 3....
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This note was uploaded on 03/05/2010 for the course ACCT 322 taught by Professor Dilss during the Spring '10 term at École Normale Supérieure.

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lecture9 - 1 Cash Flow Analysis 15.501/516 Accounting...

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