Slides - Week 3-1.pdf - Objectives 1 Understand the...

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Objectives 1. Understand the Structure and Mechanics of the Cash Flow Statement 2. Construction of Cash Flow Statement using Indirect Method . 3. Construction of Cash Flow Statement using Direct Method .
Statement of Cash Flows 1. Explains the reasons for a change in cash over a period of time. 2. Answers several important questions: Did the company generate enough cash flow internally to finance necessary investments, or did it rely on external financing? Will the company have enough cash to pay its short-term debts to suppliers and other creditors without additional borrowing? Did the company make investments and/or acquisitions 3. Helps understand the differences between net income with cash flow from operations.
Investing activities Transactions related to (1) acquisition or disposal of long-term productive assets or (2) acquisition or disposal of marketable securities not intended for active trading. Financing activities Cash flows related to transactions with owners and lenders (exception interest payments) Dividends paid to shareholders are financing activity Operating activities Transactions related to selling goods and providing services to customers and to paying expenses related to revenue generating activities (i.e. “income statement” transactions). Dividends & interest received, interest paid are considered to be operating activities under US GAAP Net change in Cash = Sum of 3 types of cash flow. Cash flow Statement Structure
Cash Flow Presentation Methods Direct method Calculates cash flow from operations from cash receipts less cash disbursements Informative about “Fundamental Cash Flows”. Indirect method Calculates cash flow from operations by adjusting net income for noncash revenues and expenses (called reconciliation). Only used for operating activities. Cash flow from operating activities is always the same regardless of whether it is computed using the direct or indirect method.
Indirect method
Direct method
Cash Flow Statement Mechanics

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