AFM101 Chapter Notes - Chapter 10: Free Cash Flow, Book Value, Retained Earnings
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AFM101 Full Course Notes
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Shows inflow and outflow of cash during the accounting period: bank overdraft should be netted against cash and cash equivalents total, net income for cash transactions only, tells us how cash has changed. Importance of cash: expand operations, replace or acquire assets, pay salaries and bills, pay interest on funds borrowed and repay principle, pay dividends to shareholders, without sufficient cash flows, company will go bankrupt. Signs of financial difficulty: low cash balance, a lot of bills and not enough cash to pay it off. Inventory isn"t being sold fast enough: average inventory turnover rate is 3 to 8 timers a year, anything lower means it takes a long time to sell inventory and cash collection is delayed. Inventory turnover = cost of goods sold/average inventory: days" inventory outstanding (dio) = 365/ accounts receivable turnover, days" sales in receivables ratio is too long. Financing activities: changes in size and composition of a company"s contributed equity and borrowings.