26 Cash_Flows 10 - 26 StatementofCashFlows...

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Statement of Cash Flows Statement of Cash Flows Accountancy 301 Spring 2011 Flora Zhou 26
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Today Today ’s agenda ’s agenda • Statement of cash flows – Cash and cash equivalents – Accrual net income vs. operating cash flows – The major sources and uses of cash—operating,  investing, and financing. – Two formats of cash flow statements • Direct method Indirect method
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Cash and cash equivalents Cash and cash equivalents Resources  immediately  available to  pay  obligations. Resources  immediately  available to  pay  obligations. Short-term, highly liquid  investments. So near maturity that there is  insignificant risk of market value  fluctuation from interest rate  changes. Maturity of 3 months or less
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Cash equivalents Cash equivalents Dr Treasury bill   100,000     Cr Cash                   100,000 • Inflow or outflow of cash? • Neither – moves $100,000 from one cash  account to another “cash” account
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Statement of Cash Flows Statement of Cash Flows The purpose  of the cash flow statement is  to show the  sources  and  uses  of cash. That  is, •Where did the cash  come from ? •Where did it  go ? Note,  this is a very difficult chapter. Read  this chapter very carefully
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Why cash flows are important Why cash flows are important • Accrual earnings  may not always provide a  reliable measure of enterprise performance and  health. – Accrual accounting relies on  subjective judgments   that may introduce measurement error and  uncertainty into reported earnings. – One-time  write-offs and restructuring charges can  reduce the quality of reported earnings. – Management can readily  manipulate  accrual income. • For these reasons, analysts scrutinize a firm’s  cash flows—not just its accrual earnings—to  evaluate performance and creditworthiness.
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The Statement of Cash Flows The Statement of Cash Flows SFAS 95 SFAS 95 Cash flows are divided into the following  three activities (sections) on SCF Operating activities Investing activities Financing activities • In addition to the three sections, SCFs also  include Supplemental disclosure
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Defining the three major types of  Defining the three major types of  business activities business activities • We’ll define investing and financing  activities first. Operating activities are the  rest of activities. • Investing activities – “include making and collecting loans and  acquiring and disposing of debt or equity  instruments and property, plant and equipment  and other productive assets (other than  inventory)” (SFAS 95)
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Investing activities Investing activities • Presented as a list of items, usually 
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This note was uploaded on 11/08/2011 for the course ACCY 301 taught by Professor Staff during the Fall '08 term at University of Illinois, Urbana Champaign.

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26 Cash_Flows 10 - 26 StatementofCashFlows...

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