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Chapter 3

FIN 300 - Chapter 3 Notes.docx

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Ryerson University
FIN 300
Mike Inglis

FIN 300 – Chapter 3: Working With Financial Statements 3.1 Cash Flow and Financial Statements: A Closer Look  Firms do two different things: (1) generate cash and (2) spend it. o Cash generated from selling a product, an asset, or a security.  Selling a security involves either borrowing or selling an equity interest. o Cash is spent by paying for materials and labour to produce a product and by purchasing assets. Paying to creditors and owners require spending cash. Sources and Uses of Cash  Sources of Cash – A firm’s activities that generate cash.  Uses (or Applications) of Cash – A firm’s activities in which cash is spent.  An increase on the left-hand side (asset) or a decrease on the right-hand side (liability or equity) account is a use of cash.  A decrease in the asset account or an increase in the liability or equity account is a source of cash.  Net addition to cash is just the difference between sources and uses of cash. Statement of Cash Flows  Statement of Cash Flows – A firm’s financial statement that summarizes its sources and uses of cash over a specified period. o Group all of the changes into three categories: operating activities, financing activities, and investment activities. Additional Information in Chapter  Common-Size Statement – A standardized financial statement presenting all items in percentage terms. Balance sheets are shown as a percentage of assets and income statements as a percentage of sales.  Common-Base-Year Statement – A standardized financial statement presenting all items relative to a certain base yea
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