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Cash flows statement Concepts H2008

Cash flows statement Concepts H2008 - Accounting and...

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1 Accounting and Financial Reporting Cash Flows Statement Concepts Accrual-Based Earnings vs. Cash Flows z Which envelope would you choose…? ± Operating cash flows ± Accounting earnings Correlation with Stock Returns (Dechow, 1995) 0 5 10 15 20 Quarter Annual Four Year TIME HORIZON % STOCK RETUR 3% 0% 11% 3% 16% Operating Cash Flows Earnings Cash Flow Statement z Why do investors find cash flow information useful? ± DeFond & Hung (2002) find its useful when: z Solvency or Liquidity is a problem z Large divergence between Cash and Net Income z Current cash flows are unusually important in a given industry z Let’s first understand HOW the cash flow statement is constructed… ± Then we will explore its usefulness… CASH AND CASH EQUIVALENTS z On the statement of cash flows, cash includes cash equivalents ± Highly liquid short-term investments that can be converted into cash with little delay z Money-market investments z Investments in U. S. Government Treasury bills OPERATING, INVESTING, AND FINANCING ACTIVITIES z A business engages in three types of business activities ± Operating ± Investing ± Financing z Each set of activities includes both cash inflows (receipts) and cash outflows (payments)
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2 Wal-Mart’s 2004 Cash Flow Statement Cash Flows from Operating Activities Three parts: Cash Flows from Investing Activities Cash Flows from Financing Activities Reconciles change in Cash Account (see Balance Sheet) Components of the Statement of Cash Flows - Big Picture - C ash received from sale of goods and services Cash paid for operating goods and services cash flow from operations Operation s -= C Cash received from sales of investments Cash paid for ac- quisition of invest- cash flow from investing Investing + -
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Cash flows statement Concepts H2008 - Accounting and...

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