Chapter 13 Flashcards
(19 cards)
What does a company need to know about cash?
> how a company generates and spends cash.
How is income calculated?
> under generally accepted accounting principles, income is calculated using the accrual method rather than on a cash basis showing cash inflows and outflows.
Does an income statement indicate the cash generation and spending of a company?
> the income statement does little to inform managers and other company stakeholders as to the sources and uses of cash.
What statements do companies use cash?
> To provide company managers and other stakeholders with information on the sources and uses of cash, companies prepare the statement of cash flows.
On cash flow statements, what is cash considered?
> For purposes of this statement, cash includes both cash and cash equivalents.
> Cash equivalents are short-term investments that are highly liquid and can be readily converted into cash.
Cash flows are classified under three types of business activities: what are they?
> operating activities, investing activities, and financing activities.
What are operating activities?
> The first classification in the statement of cash flows is operating activities, which covers cash flows related to the production and delivery of goods and services by businesses.
> In other words, operating activities reflect the day-to-day profit-oriented activities of a business.
Financial statement users focus a great deal of attention on cash flows related to operating activities because, why?
> because, over the long run, a business must generate positive cash flows from its profit-oriented activities to be economically viable.
The principal cash inflows from operating activities are:
> cash receipts from customers from both cash sales and collections of accounts receivable. It is also the case that cash received from interest and dividends are classified as operating cash inflows.
What are major sources of cash outflows?
> include payments to suppliers (such as when Ravira Restaurant Supply pays the companies from which it purchases glassware),
> payments to employees,
> and payments to taxing authorities.
What are investing activities?
> investing activities, which covers cash flows related to the buying and selling of long-term assets.
What are examples of investing activities?
> Examples of investing activities include collections from long-term loans, collections from the sale of equipment no longer in use, payments to buy debt or equity securities in other companies when these investments are not short term, buying equipment, buying a building, and buying a business.
What are financing activities?
> is financing activities, which are cash flows related to issuing and repurchasing stock, issuing long-term debt, paying off loans to debt holders, and making dividend payments to investors.
What are some outflows and inflows of cash activities?
> If Ravira Restaurant Supply obtained a long-term bank loan, the cash proceeds would be listed as cash inflows under financing activities. Furthermore, if it paid cash for dividends to investors, this would be classified as a cash outflow under financing activities.
Information in the statement of cash flows can provide tremendous insight into the operations of a company. In general, the most important part of the:
> In general, the most important part of the statement is the identification of cash flows from operating activities
What happens when a company is low in cash?
> Unless a company is able to generate cash from its core operations, it is unlikely to succeed.
> If cash flows in this section are low, this implies that a company must offset them by changes in investing and financing decisions.
It is extremely important that companies generate the cash they need to pay their current obligations to suppliers, taxing authorities, and creditors. To drive managers to focus on this, companies do what?
> companies may use the ratio of cash flow from operations to current liabilities as a performance measure.
What number should the ratio of cash flow be?
> This ratio should be greater than 1 to ensure that operations generate enough cash to pay current obligations.
> To be on the safe side, a company might set the target at 1.20 (20 percent more cash generated than needed to satisfy current obligations) or even higher if it feels a need to be especially conservative.
