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Unformatted text preview: 1 Chapter 7 Cash flow analysis In this chapter will analyze cash flow measures for insights into all business activities, with special em- phasis on operations. Attention is directed at company and business conditions when interpreting cash flows. We also consider alternatives measures of cash flows. Cash is the residual of cash inflows less cash outflows for all prior periods of a company. Net cash flows, or simply cash flows, refer to the current period's cash inflows less cash outflows. Cash flows are different from accrual measures of performance. Cash flow measures recognize inflows when cash is received not necessarily earned and outflows when cash is paid not necessarily incurred. The statement of cash flows reports cash flow measures for three primary business activities: operating, investing, and financing. Operating cash flows, or cash flows from operations, is the cash basis counterpart to accrual net income. Information on cash flows helps us assess a company's ability to meet obligations, pay dividends, increase capacity, and raise financing. It also helps us assess the quality of earnings and the dependence of income on estimates and assumptions regarding future cash flows. Statement of cash flows Relevance of cash Cash it is the most liquid assets and offers a company both liquidity and flexibility. It is both the beginning and the end of a company's operating cycle. Accrual accounting, where companies recognize reve- nue when earned and expenses when incurred, differs from cash basis of accounting. Since it is cash that ultimately repays loans replaces equipment, expands facilities, and pays dividends, ana- lyzing a company's cash inflows and outflows, and their operat- ing, financing, or investigating sources, is one of the most impor- tant investigative exercises. This analysis helps in assessing li- quidity —the nearness to cash of assets and liabilities— solvency —the ability to pay liabilities when mature— financial flexibility —the ability to react and adjust to opportunities and adversities. A comprehensive picture of cash flows is de- rived from the statement of cash flows (SCF). Interrelations between cash and noncash balance sheet accounts can be generalized: x Net changes in cash are explained by net changes in noncash balance sheet accounts. x Changes within or among noncash balance sheet accounts do not affect cash. Yet, there is dis- closure of all significant financing and investing activities in a separate schedule of noncash investing and financing activities. x Changes within the components of cash are not reported. 2 Reporting by activities SFAS 95 requires that the statement of cash flows classify cash receipts and cash payments by operating, financing and investing activities....
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This note was uploaded on 06/11/2011 for the course ACCT 3607 taught by Professor Mike during the Spring '11 term at Assumption College.
- Spring '11