CH12S - Chapter 12 Statement of Cash Flows (SCF) Purpose:...

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Page 1 of 26 Chapter 12 − Statement of Cash Flows (SCF) Purpose: To provide information about the company’s cash inflows and cash outflows during the year. This information is organized by the principal activities all corporations engage in: operating activities, investing activities, and financing activities Uses: (1) to forecast the company’s future cash flows; (2) to evaluate management’s past decisions; (3) to evaluate the company’s ability to meet its future debt obligations as they come due; (4) to evaluate the company’s ability to pay interest and dividends; and (5) to show why net income and cash flows from operating activities (making sales, etc.) are not the same. What is “Cash?” Cash = bank deposits plus cash equivalents (short-term, highly liquid, debt investments maturing in 3 months or less, e.g., Treasury bills, money market funds, certificates of deposit). SCF Classifications The statement of cash flows is divided into four sections: Cash flows from operating activities; Cash flows from investing activities; Cash flows from financing activities and Supplemental cash flow information. 1. Cash flows from operating activities reports the cash effects of the company’s normal operating activities (making sales and performing services for customers) that enter into the determination of net income. Examples include: Cash received from customers for the sale of goods or services Cash received on interest earned, dividends earned, etc. Cash paid to suppliers, to employees, for taxes, etc. Cash flows from operating activities can be identified by the analysis of each revenue and expense item on the income statement, together with changes in the related current asset or current liability from last year to this year. 2. Cash flows from investing activities reports the cash effects of buying and selling long-term assets. It is used to answer questions such as: is the company acquiring new machinery to stay competitive, are they purchasing new businesses to aid in strategic growth? Cash flows from investing activities can be identified by the analysis of changes in noncurrent assets from last year to this year . Examples include: Cash effects of buying or selling an item of property, plant or equipment. Cash effects of buying or selling an investment in the bonds or stock of another company.
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Page 2 of 26 3. Cash flows from financing activities reports the cash effects of transactions with owners and long-term creditors. Financing activities can be identified by the analysis of changes in noncurrent liabilities and stockholders’ equity from last year to this year . Examples include: Cash received from issuing stock, bonds, and long-term debt Cash paid to retire debt Cash paid to purchase treasury stock Cash paid for dividends 4. Supplemental cash flow information reports transactions of large dollar amounts that did not affect cash. For example, the company might acquire land for a future plant site
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CH12S - Chapter 12 Statement of Cash Flows (SCF) Purpose:...

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