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Canada (161,878)
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BU227 (27)
Chapter 5

Chapter 5 Reporting & Interpreting Cash Flows

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James Moore

BU227 LectureCh 5 ReportingInterpreting Cash Flows 2013UNDERSTANDING THE BUSINESSGrowing profitable operations doesnt ensure positive cash flow timing of revenuesexpensesCash flow permits a company to expand operations replace worn assets and pay dividends etcThe statement of cash flows CF focuses on a firms ability to generate cash internally its management of current assetsliabilities and the details of its investments and external financing CLASSIFICATION OF CASH FLOWSCash equivalent shortterm highly liquid investment with an original maturity of3 months 1 Readily convertible to known amounts of cash 2 So close to maturity that theres little risk that the value will change if interest rates change o Ex treasury bills ST government debt money market funds and commercial paper Statement of CF explains how beginning cash balance becomes the periodend cash balanceNet increasedecrease in cash is the combination of the net cash flows from operating net cash flows from investing and from financing activities difference between their inflowsoutflows o Calculate each net cash flow separately then combine them to get net increasedecrease in cashCash flows from operating activities directly related to earnings from normal operations o Not affected by accruals deferralsallocations from timing of revenueexpense recognition o There are 2 alternative approaches for representing the operating activities sectiono Direct method reports cash flows from operating activities as gross receipts and gross payments Inflows cash received from Outflows cash paid forCustomers net earnings profitPurchase of goods for resaleservices dividends and interest on investmentssalarieswages income taxes deferred income taxesinterest on borrowingsdepreciation of plantequipment o Indirect method adjusts accrual profit to compute cash flows from operating activities Starts with profit and eliminates noncash items to get net cash from operating activities Profitcash flows from operating activities differ due to recording of revenuesexpenses o Cash flows from operating activities is always the same regardless of which method we used o Used by 995 of companiesCash flows from investing activities cash inflowsoutflows related to the acquisitionsale of productive facilities and investments in the securities of other companies Inflows Cash received from Outflows cash paid forSale or disposal of property plant equipmentPurchase of property plant and equipmentSale or maturity of LT investments in securitiesPurchase of investments in securitiesCollections on loans Loans to others Cash flows from financing activities cash inflowsoutflows related to external sources of financing owners and creditors for the enterprise Inflows cash received from Outflows cash paid forBorrowing on notes bondsRepayment of LT principal debt to creditors mortgages etc from creditorsInterest on borrowings if its classified as a financing activityIssuing shares to shareholdersRepurchasing shares from ownersPayment of dividends to shareholders 1
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