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AFM101 Study Guide - Midterm Guide: Cash Flow, Accrual, Matching Principle

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greenclam761
16 Oct 2011
School
University of Waterloo
Department
Accounting & Financial Management
Course
AFM101
Professor
Donna Psutka

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AFM101 Full Course Notes
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AFM101 Full Course Notes
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Document Summary

When companies have lots of cash, they don"t know where to allocate it: some companies pile it away. Distorted picture of company"s performance because most of what they earn is from investments of cash, rather than operating. What do companies use this cash for: paying dividends, reinvesting by repurchasing shares, acquiring new companies, storing the cash in banks, paying off debts. Managers make poor decisions because cash is readily available. Investors can"t evaluate the performance of a company if lots of earning is from investments of cash (rather than operating) Earnings quality: company wants to know that a dollar earned is actually a dollar earned: cash flow helps evaluate the quality of earnings. Cash flows are harder to manipulate, it is a clean way to assess company"s health. Free cash flow: cash from operating activities money going towards investments. When there is a negative cash flow, it is due to heavy expenditures.

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Related Questions

When a company evaluates a company's financial health, they mustconsider the quality of accounting; they need to keep an eye on thequality of earnings and cash flows.

1) Discuss what quality of earnings and cash flows look like forinvestors.

2) Discusss what do nonquality earnings and cash flows looklike?

Here are the cash flow summaries for two companies – a manufacturer (MFR) and an On Line retailer: MFR ONLINE RETAILER Cash from Operations $75,000 $15,000 Cash from Financing 50,000 75,000 Cash from Investing <75,000> <25,000> Net Free Cash Flow $50,000 $65,000 Of the two companies, which one has higher “quality of cash flow?” Explain why.

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_________________ is the capital supplied by common stockholders--capital stock, paid-in capital, retained earnings, and, occasionally, certain reserves. _______________ is the difference between the stock’s par value and what stockholders paid when they bought newly issued shares. ______________ is the portion of the firm’s earnings that have been saved rather than paid out as dividends.

The __________________ shows how much of the firm’s earnings were retained in the business rather than paid out in dividends. Firms retain earnings primarily to expand the business, not to accumulate cash in a bank account. The ______________ __ reports the impact of a firm’s operating, investing, and financing activities on cash flows over an accounting period.

______________________ is a firm’s net income as reported on its income statement. Net cash flow, as opposed to accounting net income, is the sum of net income plus non-cash adjustments. ______________ is the cash flow actually available for distribution to investors after the company has made all investments in fixed assets and working capital necessary to sustain ongoing operations.