ECON 25000 Lecture Notes - Lecture 5: Accounts Receivable, Free Cash Flow, Income Statement

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Net income for a particular period does not equal cash flow from operations: accrual basis of account can distort the level of income equal to cash flow. The statement explains the reasons for the change in cash between balance sheet dates. Cash equivalents: represent short-term, highly liquid investments in which a firm has temporarily placed excess cash. Sheet reports changes in cash over time, while balance sheet reports specific dates. Statement classifies reasons for the change in cash as operating, investing, financing activity. Operations: indicates the extent to which operating activities generate more cash than they use: can use cash flow from operations to acquire buildings, equipment, pay dividends, retire long-term debt, and pay for other investing and financing activities. Investing: acquisition of noncurrent assets represents an ongoing use of cash. Financing: firm obtains cash from borrowing and from issuing shares of stock: uses cash to pay dividends, repay borrowing or reacquire outstanding shares of stock.

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