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Lecture 4

COMMERCE 1AA3 Lecture Notes - Lecture 4: Cash Flow Statement, Cash Cash, Cash Flow


Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Firat Sayin
Lecture
4

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Chapter 12: Statement of Cash Flows
Purposes of Cash Flow Statements
Predicts future cash flows
o Past cash receipts and payments
Evaluates management decisions
o How managers got their cash
o How cash was used to run the business
Determines ability to pay dividends and interest
o Shows ability to make these payments
Shows relations of net income to cash flows
o But cash flow can suffer even when net
income is high
Cash Equivalents
Cash Equivalents
Highly liquid short term investments
o Easily converted into cash with little delay
o E.g. Money-market investments, Canadian government securities
Cash Flow Categories
Operating
o Create revenue, expenses, gains and losses (Net Income)
Investing
o Related to long term Assets
Financing
o Related to long term Liabilities and Owners’ Equity
Relationship to Balance Sheet
Operating Cash Flows
o Current Assets
o Current Liabilities
Investing Cash Flows
o Long-Term Assets
Financing Cash Flows
o Long-Term Liabilities
o Stockholders’ Equity

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Formats for Cash Flow Statements
Indirect
o Reconciles from net income to net cash provided by operating activities
Direct
o Reports all cash receipts and cash payments from operating activities
o Investing and Financing Cash flows are the same as Indirect method
o Adjusting income statement items from accrual to cash basis
Operating Activities (Indirect Method)
Income Statement
Positive Items
o Net Income
o Depreciation and Amortization expense
o Losses on sales of long term assets
Negative Items
o Net loss
o Gain on sales of long term assets
Comparative Balance Sheets
Positive Items
o Decrease in current assets (except cash)
o Increase in current liabilities
Negative Items
o Increase in current assets (except cash)
o Decrease in current liabilities

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Investing Activities (Indirect Method)
Positive Items
o Sale of Plant Assets
o Sale of investments (not cash equivalents)
o Collections of loans (notes) receivable
Negative Items
o Acquisition of Plant Assets
o Purchase of Investments (not cash equivalents)
o Make loans to others
Financing Activities (Indirect Method)
Positive Items
o Issuing stock
o Selling treasury stock
o Borrowing money
Negative Items
o Payment of dividends
o Purchase of treasury stock
o Payment of debt (notes payable)
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