Chapter03 - Outline L03-1 Chapter 3. Working With Financial...

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L03-1 Outline Chapter 3. Working With Financial Statements Cash Flow and Financial Statements: A Closer Look Standardized Financial Statements Ratio Analysis The Du Pont Identity Using Financial Statement Information Summary and Conclusions
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L03-2 Statement of Cash Flows A firm’s financial statement that summarizes its sources and uses of cash over a specific period is called the statement of cash flows . This report is produced along with the balance sheet and income statement . It helps us to understand how the cash account in B/S has resulted. Historically, the statement of changes in financial position was produced, but it was presented in terms of the changes in net working capital rather than cash. In order to prepare the statement of cash flows, we first break down cash activities into two categories. Those activities that bring in cash are called sources of cash . Those activities that involve spending cash are called uses of cash . An increase in the LHS (asset) account or a decrease in the RHS (liability or equity) account is a use of cash . Likewise, a decrease in an asset account or an increase in a liability (or equity) account is a source of cash .
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L03-3 Prufrock corporation Balance Sheet Table 3.1 u s u u u u s s
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L03-4 Statement of Cash Flows (continued) We may summarize the sources and uses as follows: Sources of Cash : Increase in accounts payable $32 Increase in common stock 50 Increase in retained earnings 242 Total sources $324 Uses of Cash : Increase in accounts receivable $23 Increase in inventory 29 Decrease in notes payable 35 Decrease in long-term debt 74 Net fixed asset acquisitions 149 Total uses $310 Net addition to cash $14 This simple statement tells us much of what happened to the cash flow during the year, but it doesn’t tell us the whole story.
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L03-5 Statement of Cash Flows (continued) For example, from the income statement in Table 3.2, we know that the net income was $363. So, it would be more enlightening to start the statement from the net income in order to track down how the cash is generated. Table 3.2
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L03-6 Statement of Cash Flows for Prufrock Corporation Table 3.3
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L03-7 Statement of Cash Flows (continued) There is no unique way of reporting the statement of cash flows. But, the basic idea is to group all of the changes into three categories: operating activities , investment activities and financing activities as in Table 3.3. Note that the interest paid is not treated as a financing activity. The reason why the interest paid is not treated as a financing activity is that interest is deducted as an expense when net income is computed. We could have started with EBIT to express the interest paid as a use of cash in financing activity, but this is not the way the statement of cash flows is presented. Also, note that the amount of change in fixed assets was $149 in the B/S which is
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This note was uploaded on 04/13/2010 for the course TECHNOLOGY 032913 taught by Professor Hong during the Spring '08 term at 서울대학교.

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Chapter03 - Outline L03-1 Chapter 3. Working With Financial...

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