Ch 7solution - Chapter 07 - Cash Flow Analysis 7-1 Chapter...

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Unformatted text preview: Chapter 07 - Cash Flow Analysis 7-1 Chapter 7 Cash Flow Analysis REVIEW 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. This chapter describes cash flows and their relevance to our analysis of financial statements. We describe current reporting requirements and their implications for our analysis of cash flows. We explain useful analytical adjustments to cash flows using financial data to improve our analysis. We direct special attention to transaction reconstruction, T-account, and conversion analyses. Chapter 07 - Cash Flow Analysis 7-2 OUTLINE Statement of Cash Flows Relevance of Cash Reporting by Activities Constructing the Cash Flow Statement Special Topics Reporting Cash Flows from Operations Indirect Method Direct Method Converting from Indirect to Direct Method Adjustments to Cash Flow Components Additional Disclosures and Adjustments Analysis Implications of Cash Flows Limitations in Cash Flow Reporting Interpreting Cash Flows and Net Income Alternative Cash Flow Measures Company and Economic Conditions Free Cash Flow Cash Flows as Validators Specialized Cash Flow Ratios Cash Flow Adequacy Ratio Cash Reinvestment Ratio Appendix 7A Analytical Cash Flow Worksheets Chapter 07 - Cash Flow Analysis 7-3 ANALYSIS OBJECTIVES Explain the relevance of cash flows in analyzing business activities. Describe reporting of cash flows by business activities. Describe the preparation and analysis of the statement of cash flows. Interpret cash flows from operating activities. Analyze cash flows under alternative company and business conditions. Describe alternative measures of cash flows and their usefulness. Illustrate an analytical tool in evaluating cash flows (Appendix 7A). Chapter 07 - Cash Flow Analysis 7-4 QUESTIONS 1. The term cash flow was probably first coined by analysts. They recognized that the accrual system of income measurement permits the introduction of a variety of alternative accounting treatments and consequent distortions. The crude concept of cash flownet income plus major noncash expenses (such as depreciation)was derived to bypass these distortions and bring income measurement closer to the discipline of actual...
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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.

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Ch 7solution - Chapter 07 - Cash Flow Analysis 7-1 Chapter...

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