Lecture08 - Lecture 8 Statement of Cash Flows 1 Business...

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1 Lecture 8 Statement of Cash Flows
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2 Business Background Positive cash flows permit a company to . . . Expand its operations. Replace needed assets. Take advantage of market opportunities. Pay dividends to owners.
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3 Purpose of the Statement of Cash Flows To report about how the entire firm’s operating, investing and financing activities have affected its cash balances during the period covered by the statement. In this context, “Cash” is defined as cash balances plus securities with original maturities of three months or less. The cash flow statement should display all of the cash inflows and outflows within each of the three categories - operations, investing, and financing activities. It should describe only those transactions that directly affect cash.
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4 Three categories of the Statement of Cash Flows 1. Operating: activities carried out on a day to day basis to meet the goals of the company 2. Investing: activities carried out periodically that alter the firm’s infrastructure, enabling it to carry out the operating activities 3. Financing: activities carried out to obtain (and repay) funds used in the other activities Notable exception: interest payments on debt
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5 Operating Activities Reports the activities described in the income statement in the period when the revenues are collected in cash and the expenses (costs) are paid in cash. Operating cash inflows include: Amounts received from customers or other revenue sources Excludes proceeds from non-current operating assets Operating cash outflows include: Payments made to suppliers, employees, etc.
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6 Investing Activities Cash Inflows Cash Outflows Cash received from Cash paid for Sale or disposal of property, plant, and equipment Sale or maturity of investments in securities Purchase of property, plant, and equipment Purchase of investments in securities Cash paid to acquire other companies
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7 Financing Activities Cash Inflows Cash Outflows Cash received from Cash paid for Borrowing on notes, mortgages, bonds, etc. from creditors Repayment of principal on outstanding debt to creditors Issuing equity securities to owners Repurchasing equity securities from owners Dividend payments to owners
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8 Methods of Calculation Direct Method: analyze all transactions that affect the cash account; then group the
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Lecture08 - Lecture 8 Statement of Cash Flows 1 Business...

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