Chapter 13 - Objectives Chapter 13 Purpose and content...

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8/15/2011 1 Cash Flow Statement Chapter 13 Objectives Purpose and content Prepare cash flow statement – Indirect – Direct • Evaluate The Cash Flow Statement Provides information about cash receipts, cash payments, and the net change in cash during the period Chapter 13 3 Purpose of Cash Flow Statement Helps users assess – Reasons for the difference between net earnings and net cash provided (used) by operating activities – Investing and financing transactions during the period – Company’s ability to generate future cash flows Chapter 13 4 Definition of Cash Cash may include cash equivalents (although not likely to in future) Cash equivalents are short- term, highly liquid investments that are readily converted to cash within a short period of time Chapter 13 5 Definition of Cash Examples include: – Treasury bills – Money market funds – Short-term investments – Short-term debt Because the definition of “cash” varies, companies must clearly define cash if “cash equivalents” are included Chapter 13 6
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8/15/2011 2 Format of Cash Flow Statement The format is designed around the three main activities of the business: – Operating activities – Investing activities – Financing activities Chapter 13 7 Operating Activities Cash effects of transactions that create revenues and expenses that enter into determination of net earnings Balance sheet – Includes noncash current assets and current liabilities on balance sheet Statement of earnings items Chapter 13 8 Investing Activities Purchasing and disposing of investments and productive long-lived assets using cash Lending money and collecting the loans Balance sheet – Includes short-term investments and long-term asset items Chapter 13 9 Financing Activities Obtaining cash from issuing debt and repaying the amounts borrowed Obtaining cash from shareholders and paying them dividends Balance sheet – Includes short-term notes payable, long-term liabilities, and shareholders’ equity items
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