StudyGuideChap12

StudyGuideChap12 - CHAPTER 12 Statement of Cash Flows Study...

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CHAPTER 12 Statement of Cash Flows Study Objectives Indicate the primary purpose of the statement of cash flows. Distinguish among operating, investing, and financing activities. Explain the impact of the product life cycle on a company's cash flows. Steps in the Preparation of the Statement of Cash Flows Prepare a statement of cash flows using one of two approaches: (a) the indirect method or (b) the direct method. Use the statement of cash flows to evaluate a company. Chapter Outline Study Objective 1 - Indicate the Primary Purpose of the Statement of Cash Flows Study Objective 2 - Distinguish Among Operating, Investing, and Financing Activities 1. The primary purpose of the statement of cash flows is to provide information about cash receipts, cash payments, and the net change in cash resulting from the operating, investing, and financing activities of a company during the period. a. The Statement of Cash Flows (SFAS-95) identifies cash flows as being generated from three sources: i. Operating Activities 1. Operating activities include the cash effects of all transactions that create revenues and expenses and thus enter into the determination of net income. i.In general Operating activities are those activities that the business was created to perform and also includes interest from any source and any other type or revenue producing (other revenue) types of activity i. Operating activities is the most important category because it shows the cash provided or used by company operations. ii. Cash provided by operations is generally considered to be the best measure of whether a company can generate sufficient cash to continue as a going concern and to expand. ii. Investing Activities 1. include all those activities involve in long-term uses or sources of cash. i. purchasing and disposing of investments and productive long-lived assets using cash and ii.lending money and collecting the loans. i. Note that any interest revenue or expenses from these activities are operating activities iii. Investing Activities 1. Include obtaining cash from issuing debt and repaying the amounts borrowed and (b) obtaining cash from stockholders and paying them dividends i.Note that Dividends received or paid are operating activities
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b. Activities involving cash are reported in a format that reconciles the beginning and ending cash balances. i. The statement of cash flows provides answers to the following important questions: 1. Where did the cash come from during the period? 2. What was the cash used for during the period? 3. What was the change in the cash balance during the period? ii. The statement of cash flows also provides clues about whether dynamic companies will be able to thrive and invest in new opportunities or whether a struggling company will survive or perish.
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StudyGuideChap12 - CHAPTER 12 Statement of Cash Flows Study...

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