Chapter4_Lecture_2page[1]

Chapter4_Lecture_2page[1] - Chapter 4 The Statement of Cash...

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1 Chapter 4 The Statement of Cash Flows Purpose of the Statement of Cash Flows (SCF) The Financial Accounting Standard Board (FASB), which is the currently accounting rule-making body, has mandated that the SCF to be included with the other financial statements issued to external users only since 1988. To provide information about cash inflows and outflows during an accounting period. Management (internal) may use the SCF o To assess the firm’s liquidity o To assess its financial flexibility o To determine its dividend policy o To plan investing and financing needs Investors and creditors may used the SCF to assess the firm’s o Ability to pay its bills as they come due o Ability to pay dividends o Need for financing, including borrowing debt and selling capital stock Preparing a Statement of Cash Flows Preparing the statement of cash flows begins with a return to the balance sheet. 2 The balance sheet shows account balances at the end of an accounting period, and the statement of cash flows show changes in those same account balances between accounting period. SCF is prepared by: o Calculating the changes in all of the balance sheet accounts, including cash o Listing the changes in all the accounts except cash as inflows and outflows o Categorizing the flows by operating activities , investing activities , and financing activities o The inflows less the outflows balance to and explain the change in cash Cash inflows and outflows are included within each category of operating activities , investing activities , and financing activities +/- Cash Flows from Operating Activities +/- Cash Flows from Investing Activities +/- Cash Flows from Financing Activities Change in Cash Cash o Including both cash and highly liquid short-term marketable securities, also called cash equivalent .
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3 o Some companies include marketable securities as cash, because they represent short-tem highly liquid investments that can be readily converted into cash. They include U.S. treasury bills, negotiable certificates of deposit, and money market accounts. Generally, this short-term investments are made for 90 days or less. o Some companies will separate marketable securities into two accounts: (1) cash and cash equivalent and (2) short-term investments. When this occurs, the short-term investments are classified as investing activities. Operating Activities
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Chapter4_Lecture_2page[1] - Chapter 4 The Statement of Cash...

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