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Chapter 16 - REPORTING THE STATEMENT OF CASH FLOWS Chapter...

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REPORTING THE STATEMENT OF CASH FLOWS Chapter 16
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McGraw-Hill/Irwin Slide 2 STATEMENT OF CASH FLOWS Reports cash flows from operating activities as well as cash flows from investing and financing activities. The statement sums to the change in cash during the year (i.e., the difference between the beginning and ending cash balances reported on the balance sheet).
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McGraw-Hill/Irwin Slide 3
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McGraw-Hill/Irwin Slide 4 WHY IS STATEMENT OF CASH FLOWS IMPORTANT Net income reported on the income statement provides an important measure of performance. However, in the absence of cash flow, income does not pay the bills. Interest and dividend payments, required principal reductions on debt, and capital expenditures for plant and equipment and for expansion cannot be made without cash.
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McGraw-Hill/Irwin Slide 5 WHY IS STATEMENT OF CASH FLOWS IMPORTANT The non-operating sources of cash flow can be relied upon to meet the payments in the short run. e.g., in the initial stages of a firm’s life, investing cash flows are negative, operating cash flows are negative, financing cash flows are normally positive) But in long run, operating cash flow is the only reliable source of cash available to meet recurring needs.
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McGraw-Hill/Irwin Slide 6 WHY IS STATEMENT OF CASH FLOWS IMPORTANT Statement of Cash Flows helps investors with questions about the company’s: Ability to generate positive cash flows. Ability to meet its obligations and to pay dividends. Need for external financing. Investing and financing transactions for the period.
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McGraw-Hill/Irwin Slide 7 Cash Cash Currency Cash Equivalents Short-term, highly liquid investments. Readily convertible into cash. Sufficiently close to maturity so that market value is unaffected by interest rate changes. Short-term, highly liquid investments. Readily convertible into cash. Sufficiently close to maturity so that market value is unaffected by interest rate changes. MEASUREMENT OF CASH FLOWS
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McGraw-Hill/Irwin Slide 8 CASH FLOWS CLASSIFICATION Businesses perform three types of activities that are reported: 1. They acquire capital from investors and creditors: FINANCING 2. They purchase long-lived assets to use in the business and make other investments: INVESTING 3. They use the long-lived assets, hire and pay employees, and acquire and use supplies, inventories, and other resources to provide goods and services to customers for a profit: OPERATING
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McGraw-Hill/Irwin Slide 9 + _ Inflows : Cash receipts from cash sales Collection of accounts receivables Interest and dividends received Other receipts from operations Inflows : Cash receipts from cash sales Collection of accounts receivables Interest and dividends received Other receipts from operations Cash Flows from Operating Activities Cash Flows from Operating Activities OPERATING ACTIVITIES Outflows : Payments to suppliers of merchandise and services (including payments to employees)
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