bus 251 5 - H Chapter 5 8/15/08 2:16 PM Page 87 chapter...

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CHAPTER OVERVIEW In Chapter 4, performance was measured in terms of net income. In this chapter, performance is measured by examining a firm’s cash generating capability. The chapter’s opening vignette illustrates that not only commercial organizations need to manage their cash flow, but not-for-profit organizations also often face significant issues in managing cash flows. The chapter opens with an example that shows how rapidly expanding organizations often have problems managing their cash flows, even though they are profitable and growing. The lead/lag relationship between utilization and eventual replenishment of cash is examined. The discussion concludes with solutions to solving cash flow difficulties. The chapter examines the cash flow statement in terms of its history, components, format, and disclosures. The components of the statement are the cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities (the same activities introduced in Chapter 1). The cash flows from operating activities may be presented using either the direct approach or the indirect approach; only the indirect approach is discussed in the text. The direct method can be found on the companion website. Preparation of the cash flow statement requires an analysis of the income statement, the balance sheet, and other financial data. The chapter demonstrates how to use T accounts to perform this analysis using the indirect approach. This method results in a cash T account that contains all the necessary elements to prepare the cash flow statement. chapter 5 CASH FLOW STATEMENT H Chapter 5 8/15/08 2:16 PM Page 87
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Finally, the chapter presents insights into analyzing and interpreting the information contained in the cash flow statement. Users are often interested in current data to predict future cash flows. The user must determine if the cash flows from the operating activities of the firm are sufficient to cover its investing and financing activities in the long run. One way to make this deter- mination is to review the operating cash flows of the company over the previous five years. LEARNING OBJECTIVES 1. Understand the importance of cash and cash flow management to a company's financial health. 2. Describe the relationship between the cash flow statement and the income statement in assessing management performance. 3. Describe the cash-to-cash cycle for a retail company through a discussion of the lead/lag relationship. 4. Identify some solutions to cash flow problems. 5. Identify the three major activities disclosed in the cash flow statement and describe the components of each activity. 6. Prepare a cash flow statement given a company’s balance sheet and income statement. 7.
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This note was uploaded on 05/13/2010 for the course BUS 251 taught by Professor Stevegibson during the Spring '08 term at Simon Fraser.

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bus 251 5 - H Chapter 5 8/15/08 2:16 PM Page 87 chapter...

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