ch 12 Flashcards
(11 cards)
what does the statement of cashflow show
shows each major type of business acticity that caused the company cash to increase or decrease during the accounting period
catagories in the statement of cash flow
operating, investing, financing
the sum of these three catagories represents the overall change in cash flow on the balance sheet between the beggining and end of the period
word as net cash provided by
operating activities
are the cash inflows and outflows related directly to the revenues and expenses reported on teh income statement
they involve day to day business activities with customers, suppliers , employees landlords and others
investing activities
are the cash inflows and outflows related to the purchase and disposal of investements, such as securities and long lived assets
inflows from|: sale or disposal of property , platn, equipement, sale and maturity of investements
outflow: purchase property, plant , equipment, purchase of investements
financing activities
include cash received from and paid to shareholders and lenders - with the exception of interest paid
inflows: borrowing from lenders, issuing shares to owners
outflows: cash used for repaying principals to lenders, repurchasing shares from owners, paying cash dividends to owners
general rule
operating cash flows cause changes in current assets and current liabilties,
investing cash flows affect noncurrent assets
financing cash flows affects noncurrent liabilities or shareholders equity accounts
evaluating the operating activities
consider the absolute amounr of cash flow (is it positive or negative) keeping in mind that operatin cash flow have to be positive over the long run for a company to be successful, dividends should be examined
4
4 potential causes of deviations to consider include the following
- seasonaly: seasonal variation in sales and inventoy levels can cause the relationship between net income and cash flow om operations to fluctuate drom one quarter to the nexct
- the corporate lifecycle: new compnaies often experience rapi sales growth. when sales are increasing accounts receivable and invenrot notmally increase faster than the cash flows being collected from income . this isnt a big deal
- changes in revenue and expense recognition: most cases of fraudulent financial reporting involve aggressive revenue recognition or delayed expense recognition - both of these tactics cause net income to increase in the current period makking it seem as though the company has improved its performance. if revenue and expense recognition policies and changed to boost net income, cash flow from operations will be significantly lower than net income, providing one of the firs clues that the financial statement mioght contain errors or fraud
- Changes in working capital management: working capital is a measure of the amount by which current assets exceed current liabilites. if a companies current assets are allowed to grow out of control , its operating cash flow will decrease. more efficient management will have the opposite effect
evaluating cash flow from investing activities
healthy companies tend to show negative cash flows in the investing section of the statement of cash flow . a negative total for this section means the company is spending more to acquire now long-term assets than it is raking in from selling its existing long term assets.
if you see a positive total cash flow in the investing activities section, you should be concerned because it could mean the company is silling off its long term assets just to generate cash inflows
evaluating cash flows from financing activities
it does not have an obvious empected direction for cash flows- its not possible to evaluate the companys financing cahs flow by simply determining whether they are positive or negative on an overall basis - you need to consider detailed line items within this section to assess the companys overall financing strategy
overall paterns of cash flow
introductory phase when the compnay is being established, , a growth pahse when the company presence expands , a maturity phasewhen the company presence expands, a maturity phase when the conpany stabilizes, and finally a decline phase when the compnay loses its way
show different patterns of cash flow in each phase
