Notes 14 - Buying treasury stock will decrease OE • Co...

Statement of Cash Flows
• On exam:
o Prepare SCF under direct (3% of companies use) and indirect (97% of companies
use) methods
• Why care about cash flows?
o WT Grant looked good on I/S and B/S but their inventory and A/R were terrible
 They weren’t collecting cash on those assets
o Liquidity
o Quality of earnings
o Criticisms of earnings
• Why does NI differ from cash from operations?
o Cash flows may be classified as “investment” and income flows as part of “NI”
 Gain/ loss from sale of building will show up on I/S, but the cash flow will show
up as investing
• CF reporting activities:
o Operating:
 Sale of goods/ services
 Interest expense/ income
 Dividend income (but not dividends paid)
 Purchase of inventory
 Taxes
 Employee salaries
o Investing:
 Purchase/ sale of fixed assets (including business units)
 Loans/ collections
o Financing:

 Sale/ repurchase of own stock
 Proceeds/ repayment from debt issuance
 Payment of dividends