Week 5-1

Week 5-1 - Econ/Mgmt4Spring2010 TheStatementofCashFlows SCF...

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The Statement of Cash Flows “SCF” Econ/Mgmt 4 Spring 2010 Week 5-1
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Background   Total  cash flow  is the aggregate change in cash between  accounting periods – Cash t=1  minus Cash t=0 .    The SCF is a highly stylized financial statement.    Its purpose is to illustrate the sources and uses of  liquidity.     Cash flow can be attributed to three activities:  operating, investing, and financing.    The Modified Cash-basis income statement is an  approximation of cash flow from operating activities.
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History    The SCF was not an SEC required disclosure until the  late 1980’s when the FASB issued SFAS 95.    Its usefulness was made painfully apparent in the with  the W.R. Grace accounting scandal and bankruptcy.    Today, however, it is too often overlooked.      A late 1990’s WSJ article even warned that it was  misleading investors.   Read The Number  and decide for yourself.
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The Statement of Cash Flows  “SCF”    A stylized translation of the  Accrual  income statement  into a three-part statement of the S ources and Uses  of cash. 1) Cash flows from Operating Activities. 2) Cash flows from Investing Activities. 3) Cash flows from Financing Activities.   This can be expressed two ways, the two Methods : 1) The Direct Method 2) The Indirect Method
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The Activities 1) Operating Activities.  Cash flows from Revenues and  Expenses plus the cash flow affects of changes in current  assets and liabilities. 2) I nvesting Activities : Capital expenditures or divestitures –  this is the purchase (or sale) of LLA’s. 3) Financing Activities :  Borrowing long-term money,  selling stock, or paying dividends.
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The Methods The methods differ by the way Operating Activities are  translated into cash flows. Indirect Method. 
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Week 5-1 - Econ/Mgmt4Spring2010 TheStatementofCashFlows SCF...

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