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Flashcards in Chapter 12 Powerpoint Deck (21):
1

Operating activities

Cash effects of transactions that create revenues and expenses

(enter into determination of net income)

2

Investing Activities

Cassh transactions that involve the purchase or disposal of investments and property, plant, and equipment

Lending money and collecting loans

3

Financing Activities

Obtaining cash from issuing debt and repaying the amounts borrowed

Obtaining cash from stockholders, repurchasing shares, and paying dividends

4

What kind: operating activities

Income Statement Items

5

What kind: Investing Activities

Generally long-term asset items

6

What kind: financing activities

Generally long-term liability and equity items

7

Comapnies do not report in the body of the statement of cash flows significant financing and investing activities that ______________

do not affect cash

ex. direct issuance of common stock to purchase assets; conversion of bonds into common stock

*should be reported in either a seperate schedule or not

**Satisfies the FULL DISCLOSURE PRINCIPLE

8

Information of the Statement of Cash Flows comes from 3 sources:

Comparative Balance Sheets - amount of the changes in assets, liabilities, and stock-holders' equities from the beginning to the end of the period

Current Income Statement - used to determine the amount of cash provided or used by operations during the period

Additional Transaction Data - such transaction data needed to determine how cash was provided or used during the period

9

Preparing the Statement of Cash Flows involves 3 steps:

1. Determine net cash provided/used by operating activities by converting net income from accrual basis to a cash basis

2. Analyze changes in noncurrent asset and liability accounts and record as investing and financing activities, or significant noncash transactions

3. Compare net change in st. of csh flows with the change in the cash account reported on the balance sheet to make sure the amounts agree

10

Indirect Method

Adjusts net income for items that do not affect cash to determine net cash provided by operating activities

*used by 99% of companies

**converts net income from an accrual basis to a cash basis

11

Direct method

Adjusts each item in the income statement from accrual basis to cash basis

12

4 phases (in order of their occurence)

Introductory Phase

Growth Phase

Maturity Phase

Decline Phase

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Operations (60,000)

Investing (100,000)

Financing 70,000

Net income (38,000)

Introductory

14

Operations 30,000

Investing 25,000

Financing (90,000)

Net income 10,000

Decline

15

Operations 120,000

Investing 30,000

Financing (50,000)

Net income 100,000

Maturity

16

Operations (10,000)

Investing (40,000)

Financing 120,000

Net income (5,000)

Growth

17

What is Free cash flow used for?

Used to ilustrate to users the cash remaining from capital expenditures and dividends

*Cash provided by operating activities fails to take into account these two expenditures

18

Free Cash Flow Formula

= Cash Provided by Operating Activities - Capital Expenditures - Cash Dividends

*Used for liquidity and solvency

19

Current Cash Debt Coverage Ratio = 

Cash Provided by Operations

Average Current Liabilities

20

Cash Debt Coverage Ratio = 

Cash Provided by Operations

Average Total Liabilities

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