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The Concept of Cash Flow

The Concept of Cash Flow - Source of Cash = Use of Cash...

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The Concept of Cash Flow In the context of financial decision-making, what are the two most important decisions a financial manager makes? 1 Assets $1,000 Debt $400 Equity $600 Total Assets $1,000 Total Debt & Equity $1,000 Balance Sheet
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The Concept of Cash Flow The asset investment decision what the firm spends its money on ( capital budgeting ). 2 Assets $1,000 Debt $400 Equity $600 Total Assets $1,000 Total Debt & Equity $1,000 Balance Sheet
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The Concept of Cash Flow The financing decision …how a firm raises the money (debt or equity) to fund asset investments ( capital structure ). 3 Assets $1,000 Debt $400 Equity $600 Total Assets $1,000 Total Debt & Equity $1,000 Balance Sheet
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Unformatted text preview: Source of Cash = Use of Cash Cash Flow Identity • Once assets are acquired, they generate cash flows. • The cash flow identity states that the cash flow on the left-hand side of the balance sheet is equal to the cash flow on the right-hand side, such that: Cash Flow to Creditors + Cash Flow to Owners = Cash Flow From Assets 4 Cash Flow Identity Cash Flow to Creditors + Cash Flow to Owners = Cash Flow From Assets 5 à How debt is being used to finance operations and is being repaid. à Additional contributions by and return of capital to the owners. à How well assets used to create cash....
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