Session 3 - Actg 500: Intro to Financial Accounting Meeting...

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Lect 3, slide 1 Actg 500: Intro to Financial Accounting Meeting #3: Accrual Accounting and Cash Flow Statements Professor Ryan Casey College of Business Administration University of Illinois at Chicago
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Lect 3, slide 2 Summary of Meeting #2 Lecture Value of financial reporting depends on users, it links cash flow to wealth creation. B/S shows balances of cash wealth and other I/S shows how wealth created. Other measures not on F/S often used
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Lect 3, slide 3 Overview of Meeting #3 Lecture Cash flow Statements (CF/S) Cash vs accruals over firm life cycle Purpose and types of CF/S Cases Ben & Jerry case… and maybe AT Cross and UAL
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Lect 3, slide 4 Investment Financing Cap. Stock Debt Current Liabilities Accts. Payable Operations Revenues Expenses Dividend Dividend C C A A S S H H Financing Cap. Stock Ret. Earning Debt Operating Financial Equity Holdings Operations Current Assets Accts. Receivable Inventory Prepayments
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Lect 3, slide 5 Cash vs. Accrual Acctg: Cash Problems with Cash accounting - recognition of economic activity distorted - revenues and expenses not matched in time - investment in assets appears as reduction in wealth - opportunity to manipulate Benefits: simplicity
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Lect 3, slide 6 Cash vs. Accrual Acctg: Accrual Problems with accrual accounting: - judgement and discretion required of managers to measure economic activity - discretion may allow manipulations Benefits: - allows reported income to approximate economic income - expenses and revenues better matched
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Lect 3, slide 7 Cash vs. Accruals - More Examples Accruals arise when we recognize costs or benefits before or after we exchange the associated cash. Examples: Accrued interest Excess/Obsolete inventory reserve Loss reserves in insurance companies Provision for environmental hazards Provision for deferred compensation (e.g. pensions) Prepaid expenses Advances from customers
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Lect 3, slide 8 Statement of Cash Flows Purpose: Shows a company s sources and uses of cash over a specified period of time .
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Lect 3, slide 9 Statement of Cash Flows: Format Three sections of CF/S represent the different activities of the firm. Operating - cash flows from a firm s primary business. Investing - cash flows from capital expenditure decisions. Financing - cash flows from decision re: financing of assets.
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Lect 3, slide 10 International Perspective Some countries use Statement of Cash Flows Others use Statement of Sources and Uses of Funds Funds: Working Capital = Current Assets - Current Liabilities Not divided into operating, investing and financing activities
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Lect 3, slide 11 CF/S: Transactions in each section Types of transaction in each section. Operating
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This note was uploaded on 10/07/2011 for the course ACTG 500 taught by Professor Staff during the Fall '08 term at Ill. Chicago.

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Session 3 - Actg 500: Intro to Financial Accounting Meeting...

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