ORIE 3150 cash flow notes Oct 20 2009

ORIE 3150 cash flow notes Oct 20 2009 - ORIE 3150 Cash...

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ORIE 3150 Cash Flows Cash flows are very important to manage, track, and understand. Most people do not understand cash flows, so this is (or will be) an advantage for you! Analyzing cash flows is important in engineering economics and finance. Remember that a payment of cash does not indicate an expense, nor does the receipt of cash mean that the company should record revenue. The reverse is true as well. We can have an expense without the payment of cash, and we can have revenue with the receipt of cash. Hence, the income statement (which shows revenue and expenses) does not tell us the amount of cash inflow and cash outflow. Statement of Cash Flows - Classification There are three classifications of cash inflows and outflows: operating activities, investing activities, and financing activities. This is important! Changes in the level of each is an important signal. For example, if cash outflow for investment activities drops, it means we are not replacing our long term assets with new ones. Maybe we are trying to use very old computers to save cash. If cash flow from financing is all of a sudden zero, maybe the bank won’t loan us any more money as they think our company is in bad shape. Cash Flows from Operating Activities The operating activities section of the SOCF reports cash inflows and outflows directly associated with income and expenses from operations. This classification includes: Inflows Receipts of dividends Receipts from customers Receipts of interest payments Outflows Purchases of goods/services Payments of interest Payments to employees (wages) Payments of income taxes Payments of operating expenses
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Cash Flows from Operating Activities: Methods There are two alternative approaches for preparing the operating activities section of the SOCF. 1. The direct method reports the components of cash flows from operating activities as gross receipts and gross payments. This method is recommended by the FASB, but it is not widely used in practice. Cash receipts and cash expenditures are used to compute cash inflows and cash outflows from operations. The difference is called net cash inflow (outflow) from operating activities. 2.
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This note was uploaded on 10/07/2010 for the course ORIE 3150 taught by Professor Callister during the Fall '08 term at Cornell University (Engineering School).

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ORIE 3150 cash flow notes Oct 20 2009 - ORIE 3150 Cash...

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