chapter 13 Flashcards
companies can choose between which two methods
indirect or direct method
which method do companies prefer more
indirect method
what is the general format of the indirect method
start with net income and reconcile noncash items. Companies should then adjust for changes in their current accounts and arrive at net cash from operating activities.
when there is a depreciation, is there a flow of cash
no
if there is a loss
we must add it back on the statement of cash flows to solve for cash from operating activities
if there is a gain
we must deduct it on the statement of cash flows to solve for cash from operating activities.
The cash received from disposition
will be included in the investing section as it is not part of the company’s primary business activities.
increase In a/r
show a decrease in the cash flow statement
what are operating activities
day to day activities of the business
sake of goods and services
what are investing activities
purchase and sale of long lived assets needed to operate the company
sale of pppe
sale of long term debt
collecting principal on loans
what are financing activities
obtaining and repaying the funds to finance the operations of the business
sale of shares’ issue of debt
what are the four phases of a company lifecycle
: introductory, growth, maturity and decline
what is the free cash flow ratio
measures the discretionary cash flow remaining from operating activities available to use to expand operations, reduce debt, pursue new opportunities, pay additional dividends, etc
how much extra cash a company has
want it to be higher
difficult to compare companies of different size
free cash flow is calculated as
net cash provided (used) by operating activities – net capital expenditures – dividends paid.
what is free cash flow
represents excess, discretionary cash flow that a company can use to expand operations, reduce debt, increase dividends, or buy back shares
solvency measure–> if negative may be bad
what are net capital expenditures
Net capital expenditures are amounts paid for the acquisition of property, plant, and equipment less any proceeds from the disposal of such assets.
when would net capital expenditures be shown as a positive
If the proceeds received from the disposition of these assets exceeds the cash used to purchase new assets, the net capital expenditures amount in the formula shown above will result in an addition rather than a deduction
what are cash equivalents
ash equivalents are short-term, highly liquid (easily sold) investments that have insignificant risk and are readily convertible to cash within a very short time.
what happens in the introductory phase
company will report a net loss
why is operating start negative
company will usually not generate positive cash from its operating activities until near the end of the growth phase.
why is investing negative
In these phases, because the company is making significant investments in its long-lived assets, it will use cash for investing activities.
why does cash for financing activities start positive
usually positive because debt and equity are issued to pay for the investing activities and cover the operating activities’ shortfall.
as a company moves to the ,maturity and decline phases, what ahpepens
patterns will revise
why is understanding the relationship between the categories of cash flows important
- helps gain a better insight into the nature of a company activities
- forecasting future cash is also important
