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RSM219H1 (136)

MGT 201 Ch 5.docx

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Rotman Commerce
Martin Ralph

Ch 5 ; The statement of Flow 24/03/2013 7:29:00 PM Recall: operating activities, investing activities, and financing activities 1) Positive Cash flow : The lifeblood of the any company 2) Investing activities: examine the company’s decisions to buy and sell long term assets; the company’s investment strategy 3) Financing activities: what decisions It made during the period about debit and equity; estimate the reliance on debt versus equity financing Operating with a negative cash balance is only possible if the company’s bank permits it to overdraw its account ; allows more cash to be withdrawn than was deposited aka a loan. · Line of credit : the bank sets a limit on how much can be borrowed in this way and establishes a repayment schedule if the line of credit is used. Cash to Cash Cycle/ Cash conversion cycle shows the lead/leg relationship between the cash going out to buy inventory and the cash coming in from collections of accounts receivable. The statement of earnings summarizes the profitability of the company’s operations, while the statement of cash flows summarizes the cash flows, collection of cash. Solution to the Cash Flow Problems Causes: 1. High growth rates in sales  May divert customers to other competitors by reducing net income 2. Significant lead/lag relationships in cash inflows and outflows  Issue additional shares (equity financing) or to borrow the cash (debit financing)  Rate of return that the owners earn on their investment would be lower 3. Inadequate financing /undercapitalization (not much cash to begin with) Reduce rate of growth, increase its capitalization by getting more initial cash, reduce the lead/lag relationship b/w payments and collections - A statement of cash flows provides additional info that is not captured by the statement of earnings & statement of financial position Handling cash involves managing cash, short-term borrowing and temp investments -> Cash & Cash Equivalent aka Cash Position · Cash equivalent – short term, highly liquid investments that can be converted into known amount of cash; with little risk of changes in their value ; with time frame of 3 months or less ; e.g. Government of Canada treasury bills; bank overdrafts, line of credit or demand loans (temp borrowings) Component of Cash Flows The statement of cash flows summarizes all of the company’s cash flows into operating, investing & financing activities. 1. Financing Activities: obtaining resources from lenders and SHHs, & making payments to those lenders and SHHs  Issuing bonds, mortgages, notes and borrowings  Repayment of the principal of debt obligations, the payment of interest on debt, the repurchase of shares, and the payment of dividends  Interest payments are usually included in the operating section of the statement of cash flows whereas dividends is included in financing section 2. Investing Activities: long term assets  Acquisitions and disposals of capital assets and long term investments  As long as they are not cash equivalent, short term investments are also in this section 3. Operating Activities: all other cash transaction not covered by financing or investing. Cash flows that directly result from the sale of goods and services to customers.  Collection of revenues from customers  Payments to suppliers  Interest payments and payments for taxes  · Direct approach: inflows and outflows  · Indirect approach: the operating section starts with reported net earnings and shows adjustments to convert the net earnings to a cash basis and arrive at the net cash flows from operations  1 group of adjustment: to eliminate items that are included in net earnings but not cash flows  2 ndgroup of adjustment: for the changes in various in current assets and current liabilities , to convert the rev
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