Chapter7 - 7 CHAPTER Cash Flow Analysis Statement of Cash...

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Unformatted text preview: 7 CHAPTER Cash Flow Analysis Statement of Cash Flows Relevance of Cash Flows Cash Defined -- refers to cash and cash equivalents. Cash equivalents are short-term, highly liquid investments that are (1) readily convertible to known amounts of cash, and (2) near maturity (typically within 3 months) with limited risk of price changes due to interest rate shifts. Statement of Cash Flows Relevance of Cash Flows Cash is the beginning and the end of a companys operating cycle. Net cash flow is the end measure of profitability. Cash repays loans, replaces equipment, expands facilities, and pays dividends. Analyzing cash inflows and outflows helps assess liquidity, solvency, and financial flexibility . Liquidity is the nearness to cash of assets and liabilities. Solvency is the ability to pay liabilities when they mature. Financial flexibility is the ability to react to opportunities and adversities. Statement of Cash Flows Relevance of Cash Flows Statement of cash flows (SCF) helps address questions such as: How much cash is generated from or used in operations? What expenditures are made with cash from operations? How are dividends paid when confronting an operating loss? What is the source of cash for debt payments? What is the source of cash for redeeming preferred stock? How is the increase in investments financed ? What is the source of cash for new plant assets? Why is cash lower when income increased? What is the use of cash from new financing? Interrelations between cash and noncash balance sheet accounts can be generalized: Net changes in cash are explained by net changes in noncash balance sheet accounts. Changes within or among noncash balance sheet accounts do not affect cash. Yet, there is disclosure of all significant financing and investing activities in a separate schedule of noncash investing and financing activities. Changes within the components of cash are not reported . Statement of Cash Flows Cash Flow Relations Statement of Cash Flows Reporting by Activities Statement of cash flows reports receipts and payments by operating, financing, and investing activities Operating activities are the earningrelated activities of a company. Investing activities are means of acquiring and disposing of noncash assets. Financing activities are means of contributing, withdrawing, and servicing funds to support business activities. Statement of Cash Flows Net Cash Flows from Operations Indirect Method-Net income is adjusted for non-cash income (expense) items and accruals to yield cash flow from operations Direct Method-Each income item is adjusted for its related accruals *Both methods yield identical results-only the presentation format differs. Statement of Cash Flows Indirect Method Net Cash Flows from Operations Net Income + Depreciation +/- Gains (losses) on sales of assets +/- Cash generated (used) by current assets and liabilities Net cash flows from operating activities Statement of Cash Flows...
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This note was uploaded on 08/06/2010 for the course FI575 FI575 taught by Professor Srinivasan during the Spring '08 term at Keller Graduate School of Management.

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Chapter7 - 7 CHAPTER Cash Flow Analysis Statement of Cash...

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