AFM MIDTERM REVIEW CH5.doc

4 Pages
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Department
Accounting & Financial Management
Course Code
AFM 101
Professor
Grace Loney

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Description
CHAPTER 5  Cash equivalent: short-term, highly liquid investment with an original maturity of less than three months.  Page 235 sample stmt of cash flows  Cash flows from operating activities: related to earnings from normal operations  Direct method of presenting the operating activities section of the stmt of cash flows reports components of cash flows from operating activities as gross receipts and gross payments Eg. Cash inflows  cash received from customers/ dividends and interest on investments Cash outflows  cash paid for purchase of goods for resale and services/ salaries/ income taxes/ interest on borrowings  Indirect method of presenting the operating activities section of the stmt of cash flows adjusts profit to compute cash flows from operating activities Equation: profit +/- adjustments for non-cash items = net cash flow  Cash flows from investing activities: related to the acquisition or sale of productive facilities and investments in the securities of other companies Eg. Cash inflows  cash received from sale or disposal of property, plant and equipment/ sale or maturity of investments in securities Cash outflows cash paid for purchase of property, plant and equipment/ purchase of investments in securities  Cash flows from financing activities: related to external sources of financing (owners and creditors) for the enterprise Eg. Cash inflows  cash received from borrowing on notes, mortgages, bonds, from creditors/ issuing shares to shareholders Cash outflows  cash paid for repayment of principal to creditors/ interest on borrowings if it is classified as a financing activity/ repurchasing shares from owners/ dividends to shareholders  Cash= liabilities + shareholders’ equity + non-cash assets  Cash inflow  decrease in non-cash assets, increase in liabilities and equity  Cash outflow  increase in non-cash assets, decrease in liabilities and equity  Generally, 1. Operating activities account: most current assets (other than short-term investments which relate to investing activity) / most current liabilities (other than amounts owed to investors and financial institutions which related to financing activity) / retained earnings 2. Investing activities account: the remaining assets on stmt of financial position 3. Financing activities account: the remaining liability and equity/ retained earnings  Page 240 sample  General structure of operating activities: Profit + Depreciation expense + Decrease in non-cash current assets - Increase in non-cash current assets + Increase in current liabilities - Decrease in current liabilities = Net cash flows  Page 246 exhibit5.6  Quality of earnings ratio= cash flows from operating activities/ profit  it answers how much cash does each dollar of profit generate measures the prortion of earnings that was generated in cash  higher ratio indicates a greater ability to finance operating and other cash needs fro
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