Lecture08 2010.10.03 PostClass

Lecture08 2010.10.03 PostClass - Lecture 8 Statement of...

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Lecture 8 Statement of Cash Flows
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Announcements • If you have requested an excused absence for Exam 1 you will be emailed the date and time of the make-up exam Tues • HW#1 due Friday, 9am – Good indicator of exam performance – No financial statements on the exam • Exam #1 next Thursday, 10/14, 6pm-8pm – Covers Lectures 1 through 9 – Calculator, a single 8.5x11 double-sided page of notes • No class next week
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Goals of Today’s Class • Understand the three sections of the Statement of Cash Flows • Learn how the Statement of Cash Flows is Prepared
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Business Background Positive cash flows permit a company to… Expand its operations. Replace needed assets. Take advantage of market opportunities. Pay dividends to owners.
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Purpose of the Statement of Cash Flows To report about how the entire firm’s operating, investing, and financing activities have affected its cash balances during the period covered by the statement In this context, “Cash” is defined as cash balances plus marketable securities with original maturities of three months or less The cash flow statement should display all of the cash inflows within each of the three categories 1. Operations 2. Investing 3. Financing Note: Information on cash flow statement is not “new” over and above balance sheet and income statement – Its value comes from the way information is organized
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Change in Cash $887 Why?… Net Income $2,278.5
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Differences between Change in Cash and Net Income Net Income almost never reflects the actual change in cash-on-hand Accruals change net income without changing cash For example, depreciation expense lowers net income with no related change to cash-on-hand Purchases and sales can change cash without changing net income For example, purchasing equipment for cash lowers the cash balance but it does not immediately change net income Obtaining or paying off debt can change cash without changing net income For example, obtaining a new loan will increase cash without an immediate change in net income Issuing or repurchasing equity can change cash without changing net income For example, repurchasing Treasury Stock will decrease cash without a change in net income
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Statement of Cash Flows Purpose of Statement of Cash Flows is to reconcile why Net Income is different than change in Cash balance Stated differently, the Statement shows us how the change in Cash balance materialized The Statement of Cash Flows is broken down into three sections: Cash Flows from Operations Cash Flows from Investing Cash Flows from Financing What do we learn by partitioning cash flows this way?
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Net Income includes a bunch of non-cash accruals that are a normal part of business operations The firm spent or obtained cash when buying or selling assets (which only partially impacts net income through gain or loss) The firm expended or obtained money from borrowing or paying off debt and/or from issuing or repurchasing equity (which typically does not impact net income)
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This note was uploaded on 12/18/2010 for the course ACCT 101 taught by Professor Armstrong during the Fall '09 term at UPenn.

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Lecture08 2010.10.03 PostClass - Lecture 8 Statement of...

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