Ch05(3) - Chapter 5 Reporting and Interpreting Cash Flows...

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Chapter 5 Reporting and Interpreting Cash Flows
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Data from CPR Financial Statements 2007 2006 2005 Net Income $ 946.2 $ 796.3 $ 543.0 Cash from Operations $1,324.6 $1,051.0 $1,050.7 Net Increase (Decrease) in Cash $ 253.8 $ 2.5 ($ 231.2) Net Income is based on the accrual concept Revenues recognized when earned Expenses recognized when incurred to earn income Net Income does not match Cash Flows Important to examine cash flows and income to evaluate performance Pay debts with cash Less ability to manipulate cash flows
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Positive cash flows permit a company to . . . expand its operations replace needed assets take advantage of market opportunities pay dividends to owners Financial analysts consider cash flow an important indicator of a company’s financial health. Article - “Cash Flow Reigns Once Again” Business Background
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Cash Cash Equivalents Classifications on the Cash Flow Statement Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by interest rate changes (i.e., less than 3 months to maturity). Cash
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Classifications of the Cash Flow Statement Operating Activities Cash inflows and outflows directly related to earnings from normal operations. Investing Activities Cash inflows and outflows related to the acquisition or sale of productive facilities and investments in the securities of other companies. Financing Activities Cash inflows and outflows related to external sources of financing (owners and creditors) for the enterprise.
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Investing Activities Operating Activities Financing Activities Sale of operational assets Sale of investments Collections of loans Cash received from revenues Issuance of shares Issuance of bonds and notes CASH INFLOWS Business CASH OUTFLOWS Purchase of operational assets Purchase of investments Loans to others Cash paid for expenses Payment of dividends Repurchase of shares Repayment of debt
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E 5-2
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Direct Method Direct Method of presenting the Operating Activities section of the cash flow statement reports components of cash flows from operating activities as gross receipts and gross payments. The Indirect Method Indirect Method of presenting the Operating Activities section of the cash flow statement adjusts net income to compute cash flows from operating activities. Cash Flows from Operating Activities
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Ch05(3) - Chapter 5 Reporting and Interpreting Cash Flows...

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