AFM 101 Chapter 5 Notes - AFM 101 Chapter 5 Notes...

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AFM 101 Chapter 5 Notes Classification of Cash Flows The statement of cash flow explains how the cash balance at the beginning of the period changed to the ending balance. - When we say cash for this statement, it actually refers to cash and cash equivalents , which are short term, highly liquid investment that has an original maturity date of less than 3 months. - These short term investments can be considered cash because they are so close to maturity that the likelihood of their balance changing is very little o Treasury bills are a form of cash equivalents, which are notes payable issued by corporations that mature really fast Cash flow statement has 3 parts: 1. Operating activities 2. Investing Activities 3. Financing Activities Cash flows from operating activities These are cash inflows and outflows that directly relate to revenues and expenses - This is not affected by any accruals or deferred revenues and expenses because this statement is prepared on the cash basis There are two methods of preparing this section: 1. Direct Method (SOEII) This method focusses on reporting cash flows in terms of gross receipts and gross payments 2. Indirect Method Identifies change in cash flow through adjustments to profit This starts with profit, and then deductions or additions from non-cash items (A/R etc) are done in order to find cash flows. Cash flows from investing activities - Cash flows related to the purchase and disposal of capital assets and investments in other companies - Buying equipment or investing is outflow; selling equipment or investments are inflow Cash flow from financing activities - Cash flows related to external sources (owners and creditors) for the purpose of financing the entity - Inflows are borrowing on notes, mortgages, bonds and issuing shares - Outflows are repaying principles or interest, repurchasing shares and paying dividends. At the end of the statement, there is a title called net increase in cash which is basically the combinations of inflows and outflows from all 3 types of activities. Relationships to the statement of financial position and income statement To make a cash flow statement we need the accounts from the B/S and I/S. Three things are needed: 1. Comparative Statement of financial position (we need 2 years to find change in each account balance) 2. Complete income statement
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3. Additional Details (there will be some details about certain accounts which are really important to note To find net cash increase (decrease) algebraically, the formula is derived from the basic accounting equation: Assets = Liabilities + Shareholder’s equity Cash + Non- cash assets= L + SE Cash= L+ SE –non cash assets
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