LN05-ch5-AFM101s10

LN05-ch5-AFM101s10 - Chapter 5 Reporting and Interpreting...

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Financial Accounting, Third Canadian Edition 5-1 Chapter 5 Reporting and Interpreting Cash Flows
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Financial Accounting, Third Canadian Edition 5-2 Positive cash flows permit a company to . . . expand its operations replace needed assets take advantage of market opportunities pay dividends to owners Financial analysts consider cash flow an important indicator of a company’s financial health. Business Background
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Financial Accounting, Third Canadian Edition 5-3 Cash Currency Cash Equivalents Classifications on the Cash Flow Statement Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by interest rate changes (i.e., less than 3 months to maturity).
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Financial Accounting, Third Canadian Edition 5-4 Classifications of the Cash Flow Statement Operating Activities Cash inflows and outflows directly related to earnings from normal operations. Investing Activities Cash inflows and outflows related to the acquisition or sale of productive facilities and investments in the securities of other companies. Financing Activities Cash inflows and outflows related to external sources of financing (owners and creditors) for the enterprise. The Cash Flow Statement must include the following three sections:
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Financial Accounting, Third Canadian Edition 5-5 Andrew Peller Limited uses the indirect method. The indirect method is used by most companies. Statement continued . . .
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Financial Accounting, Third Canadian Edition 5-6 This ending cash balance should be the same amount that appears on the balance sheet.
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Financial Accounting, Third Canadian Edition 5-7 The Direct Method Direct Method of presenting the Operating Activities section of the cash flow statement reports components of cash flows from operating activities as gross receipts and gross payments. The Indirect Method Indirect Method of presenting the Operating Activities section of the cash flow statement adjusts net income to compute cash flows from operating activities. Cash Flows from Operating Activities
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Financial Accounting, Third Canadian Edition 5-8 The CICA Handbook recommends the direct method, but it is rarely seen in practice. Many financial executives have reported that they do not use it because it is more expensive to implement than the indirect method. Cash Flows from Operating Activities
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Financial Accounting, Third Canadian Edition 5-9 + _ Outflows to: Purchase goods (for resale) and services Salaries and wages Income taxes Interest on liabilities Inflows from: Sales to customers Interest and dividends received Cash Flows from Operating Activities - Direct Method Cash Flows from Operating Activities
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Financial Accounting, Third Canadian Edition 5-10 Reporting Cash Flows from Operating Activities—Indirect Method Net Income Cash Flows from Operating Activities - Indirect Method +/- Changes in current assets and current liabilities.
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This note was uploaded on 06/17/2011 for the course AFM 101 taught by Professor Kennedy during the Spring '08 term at Waterloo.

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LN05-ch5-AFM101s10 - Chapter 5 Reporting and Interpreting...

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