AFM101 Chapter Notes - Chapter 5: Money Market Fund, Cash Flow, Income Statement

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Published on 14 Nov 2011
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AFM 101 – Chapter #5 Notes
The statement of cash flows focuses attention on a firm’s ability to generate cash internally, its
management of current assets and liabilities, and the details of its investment and external financing. It
answers the questions:
Will the company have enough cash to pay its short-term debts to suppliers, employees,
taxation authorities, and other creditors without additional burrowing?
Is the company adequately managing its current assets?
Has the company made the necessary investments in new productive capacity?
Did the company generate enough cash flow to finance necessary investments or does it rely
in external financing
- Basically the statement of cash flow explains how the cash balance at the beginning of the period
changed to another cash balance at the end of the period. (Note: Cash also includes cash
equivalents: a short-term highly liquid investment that can be readily converted to cash with a
maturity of less than 3 months. Some examples are: treasury bills, money market funds ect...)
- Remember just because a firm had high PROFIT, DOES NOT mean a firm has high CASH flow
- The statement of Cash Flows reports on the cash inflows and outflows based on 3 broad
categories: Cash inflows/outflows of Operating Activities, Cash inflows/outflows of Investing
Activities, and Cash inflows/outflows of financing Activities.
- Also REMEMBER: Cash beginning +/- Increase/Decrease in cash
Ending Cash
Cash Flows from Operating Activities
Cash flows from operating activities are the inflows and outflows of cash directly related to the
expenses and revenues reported in the income statement, In other words the inflows and
outflows directly related to the earnings from normal operations
These cash flows are NOT affected by accruals or deferrals.
There are 2 approaches for representing the cash flows of operating activities:
1. The Direct Method – reports the components of cash flows as a list of gross receipts and
purchases.
Inflows Outflows
Cash received from: Cash paid for:
- Customers - Purchase of good for resale and services
- Dividends and interest on investments - Salaries and wages
- Income taxes
- Interest on borrowings
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