Tutorial 10 Flashcards
(44 cards)
The statement of cash flows
The statement of cash flows reports the cash receipts, cash payments, and net change in cash resulting from operating, investing, and financing activities during a period.
Operating activities
Operating activities include the cash eff ects of transactions that create revenues and
expenses. They thus enter into the determination of net income.
Investing activities
Investing activities include (a) acquiring and disposing of investments and property, plant,
and equipment, and (b) lending money and collecting the loans.
Financing activities
Financing activities include (a) obtaining cash from issuing debt and repaying the
amounts borrowed, and (b) obtaining cash from shareholders, repurchasing shares, and
paying dividends.
The indirect method
The indirect method adjusts net income for items that do not affect cash. A great majority of companies use this method. Companies favor the indirect method for two reasons:
(1) it is easier and less costly to prepare, and (2) it focuses on the differences between net income and net cash flow from operating activities.
The direct method
The direct method shows operating cash receipts and payments, making it more consistent with the objective of a statement of cash fl ows. The IASB has expressed a preference for
the direct method but allows the use of either method
Free Cash Flow Formula
Net Cash Provided by Operating Activities − Capital Expenditures − Cash Dividends
Intracompany Analysis.
Comparisons within a company are often useful to detect changes
in fi nancial relationships and signifi cant trends.
Industry averages.
Comparisons with industry averages provide information about a
company’s relative position within the industry.
Intercompany basis.
Comparisons with other companies provide insight into a company’s competitive position.
Horizontal analysis
Horizontal analysis, also called trendanalysis, is a technique for evaluating a series of fi nancial statement data over a period of time. Its purpose is to determine the increase or decrease
that has taken place. This change may be expressed as either an amount or a percentage.
Vertical analysis
Vertical analysis, also called common-size analysis, is a technique that expresses each financial statement item as a percentage of a base amount
Ratio analysis
Ratio analysis expresses the relationship among selected items of financial statement data. The relationship is expressed in terms of either a percentage, a rate, or a simple proportion.
Change Since Base Period Formula
(Current Year Amount − Base Year Amount) / Base Year Amount
Current Results in Relation to Base Period
Current Year Amount / Base Period Amount
Liquidity Ratios
Measure short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash
Profitability Ratios
Measure the income or
operating success of a company
for a given period of time
Solvency Ratios
Measure the ability of
the company to survive
over a long period of time
Current Ratio Formula
Current Assets / Current Liabilities
Current Ratio meaning
The current ratio is a widely used measure for evaluating a company’s liquidity and
short-term debt-paying ability.
Acid-Test ratio meaning
The acid-test (quick) ratio is a measure of a company’s immediate short-term liquidity.
Acid-Test ratio formula
(Cash + Short-Term Investments + Accounts Receivable (Net) ) / Current Liabilities
Accounts Receivable Turnover meaning
It measures the number of times, on average,
the company collects receivables during the period
Accounts Receivable Turnover Formula
Net Credit Sales / Average Net Accounts Receivable
