Cash_Flow_Statement_Notes - ACCT 100 Chapter 14 Cash Flow...

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ACCT 100 Chapter 14 Cash Flow Statements Cash flow statements provide investors with a detailed explanation of the change in the cash balance over the accounting period. It gives investors insight into the company’s solvency (i.e., ability to remain in business) and ability to have cash on hand to meet short-term obligations or pursue unexpected investment opportunities. It also provides investors with cash flow projections that are then used to make current stock price estimations. The cash flow statement groups cash flows into three main categories that represent sources and reductions of cash throughout the accounting period. The three categories include: 1. Cash flows from operations - the operating cash flow section describes cash flows generated from routine business activities such as receiving payment for past credit sales (and current cash sales), paying employees, paying suppliers and paying interest, to name a few. Operating cash flows are of primary importance because they represent the portion of net income that is generated from actual cash receipts rather than from changes in accrual balances (e.g., accounts receivable, interest receivable, etc.). Specifically, Net Income = Operating Cash Flows + Δ Accrual Accounts + Depreciation Investors are likely to have greater confidence in reported net income when net income is comprised of relatively more operating cash flows than from changes in accrual accounts. This is because accrual account balances usually reflect management’s judgments and estimates about accounting transactions and can be inaccurate. In other words a company with a relatively higher percentage of net income arising from accrual accounting will have earnings that are perceived to
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Cash_Flow_Statement_Notes - ACCT 100 Chapter 14 Cash Flow...

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