Chapter 11: Cash Flows Flashcards
What is the definition of cash in cash flows?
Cash + Cash equivalents
What are Cash eqivalents?
Short term, highly liquid investments - Have three months or less of a maturity date
What are the categories for inflows and outflows?
Operating Activities
Investing Activities
Financing Activities
Operating Activities definition?
Cash flows related to revenues & expenses on statement of earnings
Indirect Method for Operating activities
+ Depreciation & Amortization expense
- Gain on sale of investing activities
+ Loss on sale of investing activities
+ decrease in operating assets
- Increase in operating assets
+ increase in operating liabilities
- Decrease in operating liabilities
= Net cash flows from operating activities
Investing Activities Definition
Cash flows related to transactions involving long-lived productive assets & investments in the securities of other companies
Inflows related to investing activities
- Cash received from
- Sale or disposal of P.P.E
- Sale or maturity of Investments in securities
Outflows related to investing activities
- Cash paid for
- Purchase of P.P.E
- Purchase of investments in securities
Cash flows from financing activities definition
Cash flows related to owners and creditors to finance the enterprise and its operations
Inflows related to financing activities
-Cash received from
-Borrowing on notes, mortages, bonds, etc from creditors
- Issuing shares to shareholders
Outflows related to financing activities
- Cash paid for
- Repayment of principal to creditors
- Interest on borrowings, if classified as financing activity
- Repurchasing shares from shareholders
- Dividends to shareholders
What is the Cash flows Equation?
△Cash =△Liabilities+△S.E -△Non-Cash Assets
Increase in Cash/Cash inflow=?
- Decrease in non-cash asset account
- Increase in liability & S.E accounts
Decrease in cash/Cash outflow=?
- Increase in non-cash asset account
- Decrease in liability & S.E accounts
What is the quality of earnings ratio?
How much cash does each dollar of net earning generate
Quality of Earning Ratio =Cash flow from operating activity / Net earnings
Report Cash flows from investing
P.P.E & Intangible Assets
- Purchase = Outflow
- Sale = Inflow
Short or long-term investments & shares in other businesses
- Purchase = Outflow
- Sale = Inflow
What are some common investing purchases?
Purchases of tangible productive products
- P.P.E
Purchase of intangible assets
- Trade marks, patents
Short or long term investments
- Shares or bonds in other companies
- GIC’s
- Securities > 3 months maturity
What is the capital expenditure ratio?
Cash flow from operating activities / cash paid for capital expenditures
Free cash flow equation
Cash flows from operating activities - dividends - capital expenditures
How do you report cash flows from Short term debt?
Short term debt
- Borrowing from bank = inflow
- repayment of loan principle = outflow
How do you report cash flows from Long term debt?
Long term debt
- Long term borrowing for cash = inflow
- Repayment of principal on long term borrowing = outflow
What are some common investing sales?
Sale of productive assets
Sale of intangible assets
Maturity or sale of investments
How do you report cash flows from Share capital?
- issuing of shares - inflow
- repurchase of shares = outflows
How do you report cash flows from retained earnings?
payments of cash dividends = outflow
What are some common financing activities?
- Proceeds from issuance of short & Long term debt
- Principal payments on short & long term debt
- Proceeds from issuance of shares
- Purchase of shares for retirement
- Interest and dividends
Calculations for investing activities?
- Purchase of P.P.E or intangible assets
+ sale of P.P.E or intangible assets - Purchase of investment securities
+ Sale or maturity of investment securities
= Net cash flow from investing activities
Calculations for financing activities?
+ Borrowings from bank
- repayment of loan principal
+issuance of long term debt for cash
- repayment of principal on long term debt
+ Issuance of shares
- repurchase of shares
- payment of dividends
= Net cash flow from financing activities
