AC202 Chapter 16 & 17 Lecture

AC202 Chapter 16 & 17 Lecture - Chapter Outline I...

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Chapter Outline I. Basics of Cash Flow Reporting A. Purpose of a Statement of Cash Flows To report all major cash receipts (inflows) and cash payments (outflows) during a period. This report classifies cash flows into operating, investing, and financing activities. It answers important questions such as: 1. How does a company obtain its cash? 2. Where does a company spend its cash? 3. What is the change in the cash balance? B. Importance of Cash Flows Information about cash flows, and its sources and uses, can influence decision makers in important ways. C. Measuring Cash Flows The phrase, cash flows refers to both cash and cash equivalents . A cash equivalent must satisfy two criteria: 1. Be readily convertible to a known amount of cash. 2. Be sufficiently close to its maturity date so its market value is unaffected by interest rate changes. D. Classifying Cash Flows Cash receipts and cash payments are classified and reported in one of three categories: 1. Operating activities include transactions and events that determine net income (with some exceptions such as unusual gains and losses). Specific examples: a. Cash inflows from cash sales, collections on credit sales, receipts of dividends and interest, sale of trading securities, and settlements of lawsuits. b. Cash outflows for payments to suppliers for goods and services, to employees for wages, to lenders for interest, to government for taxes, to charities, and to purchase trading securities. 2. Investing activities include transactions and events that affect long-term assets, namely purchase or sale of these assets. Specific examples: a. Cash inflows from selling long-term productive assets, selling available-for-sale securities, notes and held-to-maturity securities, and collecting principal on loans to others. b. Cash outflows from purchasing long-term productive assets, purchasing available for sale securities and held-to-maturity securities, and making loans to
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others.
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3. Financing activities includes transactions and events that affect long-term liabilities and equity: a. Cash inflows from owner contributions, from issuing company’s own stock, from issuing bonds and notes and from issuing short and long-term debt. b. Cash outflows from repaying cash loans, owner’s withdrawals, paying shareholder’s cash dividend and purchasing treasury stock. E. Noncash Investing and Financing Activities Activities that do not affect cash receipts or payments but because of their importance and the full disclosure principle they are disclosed at the bottom of the statement of cash flows or in a note to the statement. F. Format of the Statement of Cash Flows 1. Lists cash flows by categories (operating, financing and investing) and identifies the net cash inflow or outflow in each category.
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