Review Notes Ch 12

Review Notes Ch 12 - CHAPTER 12 Statement of Cash Flows...

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CHAPTER 12 Statement of Cash Flows Study Objectives 1. Indicate the usefulness of the statement of cash flows. 2. Distinguish among operating, investing, and financing activities. 3. Explain the impact of the product life cycle on a company's cash flows. 4. Prepare a statement of cash flows using the indirect method. 5. Use the statement of cash flows to evaluate a company. 6. Prepare a statement of cash flows using the direct method. (Appendix) 12-1
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Chapter Outline Study Objective 1 - Indicate the Usefulness of the Statement of Cash Flows The statement of cash flows reports the cash receipts, cash payments, and the net change in cash resulting from the operating, investing, and financing activities of a company during the period. The information in a statement of cash flows should help investors, creditors, and others assess: The company’s ability to generate future cash flows. By examining relationships between items in the statement of cash flows, investors and others can better predict the amounts, timing, and uncertainty of future cash flows. The company’s ability to pay dividends and meet obligations. Employees, creditors, stockholders, and customers should be particularly interested in this statement because it alone shows the flows of cash in a business. The reasons for the difference between net income and net cash provided (used) by operating activities. Many financial statement users can investigate the reasons for the difference between net income and cash provided by operating activities. Then they can assess for themselves the reliability of the income numbers. The investing and financing transactions during the period. By examining a company’s investing activities and financing activities, a financial statement reader can better understand why assets and liabilities increased or decreased during the period. Study Objective 2 - Distinguish Among Operating, Investing, and Financing Activities The statement of cash flows classifies cash receipts and cash payments into operating, investing, and financing activities. Transactions within each activity are as follows: The Operating Activities category includes the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. The Investing Activities category includes (a) purchasing and disposing of investments and productive long-lived assets using cash and (b) lending money and collecting the loans. The Financing Activities category includes (a) obtaining cash from issuing debt and repaying the amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends. Operating activities is the most important category because it shows the cash provided or used by company operations. Cash provided by operations is generally considered to be the best measure of
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This note was uploaded on 08/18/2010 for the course ACCOUNTING 6020 taught by Professor Seki during the Spring '10 term at FAU.

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Review Notes Ch 12 - CHAPTER 12 Statement of Cash Flows...

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