Ch18 - Chapter 18 - The cash flow statement CHAPTER...

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Chapter 18 - The cash flow statement CHAPTER OVERVIEW In some of the preceding chapters, reference has been made to the cash flow statement and the cash flow effects of selected transactions. Many people think the cash flows statement is more important than the income statement and the balance sheet. It is certainly the most complex of the published financial statements. The learning objectives for this chapter are to: 1. Identify the purposes of the cash flow statement 2. Report cash flows from operating, investing and financing activities 3. Prepare a cash flow statement by the direct method 4. Calculate the cash effects of a wide variety of business transactions 5. Prepare a cash flow statement by the indirect method 6. Summarise supplementary disclosures required by accounting standards CHAPTER REVIEW Objective 1 - Identify the purposes of the cash flow statement. Cash flows are cash receipts and cash payments. The cash flow statement reports all these receipts and disbursements under three categories (operating, investing, and financing) and shows the reasons for changes in the cash balance. The statement is used to: 1. Predict future cash flows 2. Evaluate management decisions 3. Determine the company’s ability to pay dividends to shareholders and interest and principal to creditors 4. Show the relationship of net profit to changes in the business’s cash. The term ‘cash’ is used to include cash equivalents that are liquid short-term investments (such as bank bills and money market accounts and short term money market investments). Objective 2 - Report cash flows from operating, investing and financing activities. Operating activities create revenues and expenses in the entity’s major line of business. Therefore, operating activities are related to the transactions that make up net profit. Operating activities include: 1. collections from customers 2. payments to suppliers and employees 3. interest revenue and expense 4. taxes 5. dividends received on investments Operating activities are always listed first because they are the largest and most important source of cash for a business. The cash flow statement 1
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Investing activities increase and decrease the assets with which the business works. Investing activities require analysis of the non-current asset accounts and include: 1. buying and selling non-current assets and investments 2. lending money to others and collecting principal repayments Investing activities are critical because they help determine the future course of the business. Financing activities obtain the funds from investors and creditors needed to launch and sustain the business. Financing activities require analysis of the non-current liability accounts and the owners’ equity accounts and include: 1. issuing shares 2. share buy-backs 3. paying dividends 4. borrowing money and repaying the principal Study Tip : While principal payments on bills and bonds payable and debentures are a financing activity, the interest payments are classified as an operating activity. Review Exhibit 18-2 in your text and become familiar with both the format and content of a cash
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This note was uploaded on 10/10/2010 for the course ECON 7300 at University of Sydney.

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Ch18 - Chapter 18 - The cash flow statement CHAPTER...

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