Typical Cash Receipts and Payments Classified by Activity
From sale of goods or services
From returns on loans (interest received) and on equity
securities (dividends received)
To suppliers for inven
Steps to determine the Increase and decrease in Cash Notes
Step 1: Determining the Increase/Decrease in Cash
Determining the increase/decrease in cash during the year is
a simple computation.
As shown on the comparative balance sheet, Computer
Conversion to Net Cash Provided by Operating Activities
As shown in the previous illustrations, the statement of cash flows
prepared by the indirect method starts with net income and adds
or deducts items not affecting cash, to arrive at net cash pr
Significant Noncash Activities Notes
Not all of a company's significant activities involve cash.
Four examples of significant noncash activities are:
Conversion of bonds into common stock
Issuance of debt to purchase assets
Issuance of common stock to pur
Net Cash Operating Activities Notes
Once again, to determine net cash provided/used by operating
activities under the indirect method, net income is adjusted for
income items that did not affect cash.
Explanations for the adjustments to net income for Com
Preparing the Statement of Cash Flows Steps Notes
Preparing the statement of cash flows involves the following
Determine the net increase/decrease in cash.
Determine the net cash provided/used by operating
Determine the net cash p
Simplifying Assumptions on the NPV Method Notes
In the examples of the NPV method, a number of simplifying
assumptions have been made:
All cash flows come at the end of each year.
All cash flows are immediately reinvested in another project
that has a sim
The Corporate Life Cycle Notes
All products go through a series of phases called the
product life cycle.
The phases (in order of their occurrence) are often referred
to as the introductory phase, growth phase, maturity
phase, and decline phase.
We can cha
Usefulness of the statement of Cash Flows Notes
Many investors believe cash flow is less susceptible to
management manipulation and fraud than traditional
accounting measures such as net income.
Although reliance on cash flows to the exclusion of accrual
The Primary Purpose of the Statement of Cash Flows Notes
The primary purpose of the statement of cash flows is to
provide information about cash receipts, cash payments, and
the net change in cash resulting from the operating,
investing, and financing act
Profitability Index Notes
One relatively simple method of comparing alternative projects
that takes into account both the size of the original investment
and the discounted cash flows is the profitability index. The
profitability index is computed with th
Comparing Discounted Cash Flow Methods Notes
A comparison of the two discounted cash flow methods (net
present value and internal rate of return) is presented
When used properly, either method will provide management
with relevant quantitative data
Internal Rate of Return Method Notes
The internal rate of return method results in finding the
interest yield of the potential investment.
The internal rate of return is the interest rate that will cause
the present value of the proposed capital expenditu