Chapter 4 Flashcards
statement of cash flows
tells how a company generated cash (inflows) and how it used cash (outflows)
liquidity
ability to pay near-term liabilities and take advantage of investment opportunities
solvency
ability to pay long-term liabilities
cash equivalents
short-term, highly liquid investments that are easily convertible to a known cash amount and close enough to maturity that their market value is not sensitive to interest rate changes
examples of cash equivalents
treasury bills, commercial paper, money market funds
operating activities
selling or rendering services; activities include any cash receipts or payments that are not classified as investing or financing activities
what type of activity is cash receipts from customers for sales made or services rendered (or in anticipation of future deliveries of goods or services)
operating inflow activity
what type of activity is cash receipts of interest and dividends
operating inflow activity
what type of activity is other cash receipts that are not related to investing or financing activities (rentals, lawsuit settlements, refunds received from suppliers)
operating inflow activity
what type of activity is cash payments to employees or suppliers
operating outflow activity
what type of activity is cash payments to purchase inventories
operating outflow activity
what type of activity is cash payment of interest to creditors
operating outflow activity
what type of activity is cash payments of taxes to governments
operating outflow activity
what type of activity is other cash payments that are not related to investing or financing activities (contributions to charity, lawsuit settlements)
operating outflow activity
investing activities
acquisition and disposal of property, plant, and equipment assets and intangible assets; purchase and sale of government securities and securities of other companies (stocks, bonds, securities not classified as equivalents) and the lending and subsequent collection of money
what type of activity is cash receipts from sales of property, plant, and equipment assets and intangible assets
investing inflow activity
what type of activity is cash receipts from sales of investments in government securities and securities of other companies
investing inflow activities
what type of activity is cash receipts from repayments of loans by borrowers
investing inflow activities
what type of activity is cash payments to purchase property, plant, and equipment assets
investing outflow activities
what type of activity is cash payments to purchase government securities of other companies (including acquisitions)
investing outflow activities
what type of activity is cash payments made to lend money to borrowers
investing outflow activities
financing activities
receives cash from shareholders, returns cash to shareholders, borrows from creditors, repays amounts borrowed
what type of activity is cash receipts from issuances of common stock and preferred stock and from sales of treasury stock
financing inflow activity
what type of activity is cash receipts from issuances of bonds payable, mortgage notes payable and other notes payable
financing inflow activity
what type of activity is cash payments to acquire treasury stock
financing outflow activity
what type of activity is cash payments of dividends
financing outflow activity
what type of activity is cash payments to settle outstanding bonds payable, mortgage notes payable, and other notes payable
financing outflow activity
direct method
presents components of cash flow from operating expenses as a list of gross cash receipts and gross cash payments; less than 5% of companies use this
indirect method
reconciliation of net income to operating cash flow is used for cash flow from operations; begins with net income and applies a series of adjustments
why is the indirect method popular for statement of cash flows?
its easier and less expensive, companies that use the direct method are required to present supplemental disclosure showing reconciliation of net income to cash from operations anyways
when do cash flows from investing activities increase?
sales of assets
when do cash flows from investing activities decrease?
purchase of assets
when do cash flows from financing activities increase?
taking on liability or issuing shares
when do cash flows from financing activities decrease?
repaying principal on a financial liability or paying dividends to shareholders or making share repurchases
noncash investing and financing actities
do not affect cash flows; issuance of stocks, bonds, or leases in exchange for PPE for example; exchange of long term assets for other long term assets; conversion of long term debt into common stock
operating cash flow to current liabilities equation
operating cash flow/average current liabilities
operating cash flow to capital expenditures equation
operating cash flow/annual capital expenditures
free cash flow equiation
operating cash flow-net capital expenditures
