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BUS 251 (101)
Chapter 5

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Business Administration
BUS 251
Steve Gibson

BUS 251 Chapter 5 Notes The Statement of Cash Flow  Users will look at the operating activities to see whether it is generating a positive cash flow because this is the factor determining growth  Under the financing activities, the user can see the company’s decisions to issue shares and borrow bank loans to generate cash then pay dividends and repay loan  financial strength and strategy  Under the investing activities, the users can see what investment the company made on long-term assets or long-term ownership of other companies  access investment strategy Another flow statement  As earnings and accounts receivables increase while decreasing inventory without declining accounts payable means that we are running low on cash  cash shortfall o You can have negative balance in your bank according to your line of credit for over-drafting  Cash-to-cash cycle show the lead/lag relationship between cash outflow and no inflow but increase in A/R o Example: one month lag for inventory to arrive and one month lag to receive A/R  Statement of earnings are prepared under accrual basis so it is hard to track down cash, but cash is very important asset for company to operate so we need the cash-flow statement o Statement of earnings summarize the profitability not cash flow Solutions to cash flow problems  High-growth rates: the start up companies usually have rapid growth of sales  buy more inventory  expand storage and operating capacity  need cash  lead/lag relationship  Inadequate capitalization: companies don’t collect enough cash in the beginning  Reduce the rate of growth: o Reduce the inventory sold  reduce net earnings + may hurt the customer relationships + divert customers to competitors  reduce long-term potentials  Increasing amount of capitalization: o Start off with more cash through either shareholders or bank  no effect on net earnings but rate of returns are lower + give up some of ownership and control to shareholders + pay high interest rates on the higher loans  Reducing lead/lag relationship o Reduce company’s cash-to-cash cycle  customers paying by credit cards and cash instead of A/R + purchase inventory on A/P instead of cash Understanding and preparing statement of cash-flows  Cash and cash equivalent are the short-term investment that can earn higher interest than chequing accounts and can be converted to cash in short period of time o Demand note are very liquid (opposite of short-term investments)  Components of cash flows o Divided into three primary business activities: operating, investing, financing o At the bottom says the interest paid and received in cash and income tax paid in cash  Financing activities o Cash inflow: issuing bonds, mortgages, notes, shares and borrowing o Interests are paid as dividends for the use of shareholder’s money so financing activities  Interest payments for bank loans are operating activities  Investing activities o Balance sheet (long-term assets) accounts: buying and selling capital assets and short-term investments that are not cash equivalent (liquid) o Replacing of long-lived assets: inflow from old asset disposal < outflow for new asset o Only need to write down how much cash is used to acquire the asset not how much it actually costs  Operating activities o Balance sheet (current assets and liabilities) accounts including interest payments and taxation o Direct approach: record down what is paid and what is received every transaction BUS 251 Chapter 5 Notes o Indirect approach: start with reporting the net income  show adjustment convert the net income to cash ba
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