Disadvantage uses yr end balances instead of current

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i. disadvantage: uses yr end balances instead of current asset and current liab accounts which may not be representative of the co’s position during most of the yr b. current cash debt coverage ratio: cash provided by operating activities/average current liabilities i. because cash provided by op activities involves the entire yr, it is better representation of liquidity 4. Solvency is the ability of a company to survive over the long term a. a measure of solvency is the cash debt coverage ratio: ratio of cash provided by operating activities to total debt, as represented by average total liabilities b. ratio indicates a company’s ability to repay its liabilities from cash generated from operations without having to liquidate productive assets such as property and equip c. cash debt coverage ratio=cash provided by operations/average total liabilities C. Limitations of the Statement of Cash Flows 1. Cash flow from operations is not accrual net income 2. Cash flow from operations can be misleading a. can overstate net income NOTES FROM 271: Statement of Cash Flows Operating - reports the cash effects of items on the income statement (pay interest on bonds) Investing cash flows - reports the cash effects of acquiring and selling long term assets Financing cash flows - reports the cash effects involving investors and long term debt (buy/sell stock, dividends, issue bonds/pay bonds) Operating Cash Flows Section: The section of the statement that reports cash provided (used) by operating activities can be presented using either direct or indirect method: 1. Direct Method: Presents in the form of a cash based income statement cash collected from customers-cash paid to suppliers=cash provided (used) by op activities 2. Indirect method: starts with net income and adjusts for non cash items: net income + non cash expenses on income statement (ie: dep) +/- adjustments for changes in current accounts = cash provided (used) by operating activities *Use this formula to see what happens to cash when making adjustments: cash+other current assets+long term assets=current liabilities+long term liabilities+SE operation: cash+other current assets=current liabilities example- A/R increases, cash decreases (same side of equation) A/P decreases, cash decreases (opp side of equation) Investing Cash Flow Section: take into account buy/sell assets Financing Cash Flow Section: use RE and NI to find Dividends
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