The Statement of Cash Flows
- operating activities
o users will examine the statment to see whether the operating
activities are generating a positive cash flow.
- financing activities
- investing activities
- cash to cash cycle
o illustrates the lead/lag relationship between the cash going out to buy
inventory and the cash coming in from the collections of accounts
- **since the statement of earnings in prepared on an accrual basis and
measures performance in terms of the revenues earned and the expenses
incurred during a particular time period, regardless of whether the revenues
are collected in cash or the expenses are paid in cash during that period, it is
not very useful in tracking cash flows.
- ** because a company cannot operate w/out cash, it makes sense that we
need a statement of cash flows.
- Cash flow problems in companies
o 3 fundamental causes
1. High growth rate in sales
combat? Slow down the rate in sales? But obviously not
the best answer b/c it reduces net earnings and may
hurt the company in the long run.
2. Significant lead/lag relationships in cash inflows and
combat? Reduce lead/lag relationship – reduce the
length of the company’s cash conversion cycle – get
customers to pay cash or to not pay in 30days, maybe
3. Inadequate financing or undercapitalization (in this context
refers to the cash the company begins with)
combat? Increase capitalization/start with more cash? -
- > get it through equity financing and to borrow the
- Cash sitting in a chequing account typically earns little to no interest – proper
cash management would be investing that cash into something else.
- Must consider cash and cash equivalents – cash position: short-term, highly
liquid investments that can readily be converted into known amounts of
cash. Must be close enough to maturity that there is little risk of changes in
their value, due to changes in interest rates or other economic factors.
Suggested time frame = 3 months or less. Also includes temporary
borrowings that companies use for short periods of time, such as bank
overdrafts, lines of credit, or demand loans. Components of Cash Flows
- Financing activities
o The activities involved in obtaining resources from lenders and
sharholders, and making payments to those lenders and shareholders.
o Typical inflows: issuing bonds, mortgages, notes
o Typical outflows: repayment of the principal of debt obgliations, the
payment of inter