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

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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:
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Sale/ repurchase of own stock Proceeds/ repayment from debt issuance Payment of dividends
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Unformatted text preview: Buying treasury stock will decrease OE: • Co. wants ROE to be good so they buy treasury stock to decrease OE • Indirect approach (only concerns operating): o Start w/ NI o List of adjustments • Direct approach: o Preferred by banks giving loans o Not preferred by co. management though o Ex. why, in 2009, is Xerox not spending excess cash from operating on investing and financing? Not a ton of answers, but many questions • To create SCF: o B/S w/ 2 years information and I/S w/ 1 year needed o From B/S: Calculate change from year-to-year What activity does it go in (operating?, investing?, financing?) Things labeled cash: • All O,I,F changes should add up to the “cash” changes • Make SCF common-size: o Put all inflows together o Put all outflows together For operations, only put one-line (the final total/ bottom line)...
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