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Week 6- Cash flow statements - direct method

Week 6- Cash flow statements - direct method - Cash flow...

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Cash flow statements Cash flow statement Purpose and format Purpose To provide information about: Cash receipts Cash payments Net change in cash resulting from operating, investing and financing activities It reconciles beginning and ending cash balances. Cash flow information helps investors, creditors and other interested parties to assess: *the ability of an entity to: Generate positive cash flows from operating activities Generate positive net cash flows in the future To assess solvency Fund changes in the size or nature of activities (e.g. fund a new factory) Obtain external finance (e.g. a loan) *the sources and use of cash over a period Classification of cash flows 1) Operating activities: revenue-generating activities such a provision of goods or services. E.g. cash receipts from customers, cash payments to suppliers, cash expenses, interest paid 2) Investing activities: acquisition or disposal of long-term assets, including purchasing and selling of non-current assets, and lending money and collecting the loans. E.g. payments for purchase of investments, proceeds from sale of investments, from sale of PPET, from collection of principal on loans to other entities (inflow) 3) Financing activities: affects size and composition of contributed equity and borrowing, and include obtaining cash from issuing debt, repaying the amounts borrowed, cash from shareholders and payment dividends Significant of non-cash activities Significant financing and investing activities that don’t affect cash are not reported in the statement of cash flows but in the notes. They are important as it provides are more comprehensive picture.
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