Statement of Cash Flows Review

Flashcards on Statement of Cash Flows

Positive cash flows

Permit a company to expand operations, replace worn assets, take advantage of investment opportunities, and pay dividends to owners.

Cash equivalents

Short-term, highly liquid investments that are readily convertible into known amounts of cash and so near to maturity there is little risk that their value will change if interest rates change.

Cash

Money or any instrument that banks will accept for deposit and immediate credit to a company’s account

Operating Activities

Cash inflows and outflows directly related to earnings from normal operations.

Investing Activities

Cash inflows and outflows related to the acquisition or sale of productive facilities and investments in the securities of other companies.

Financing Activities

Cash inflows and outflows related to external sources of financing (owners and creditors) for the enterprise.

Direct Method

Reports the cash effects of each operating activity.

Indirect Method

Starts with accrual net income and converts to cash flow from operating activities.

Cash Inflows from Operating Activities Sources

Cash received from customers, dividends, and interest on investments.

Cash Outflows from Operating Activities Uses

Cash paid for purchase of services and goods for resale, salaries and wages, income taxes, and interest on liabilities.

Cash Inflows from Investing Activities Sources

Cash received from sale or disposal of property, plant, and equipment and sale or maturity of investments in securities.

Cash Outflows from Investing Activities Uses

Cash paid for purchase of property, plant, and equipment and purchase of investments in securities.

Cash Inflows from Financing Activities Sources

Cash received from borrowings on notes, mortgages, bonds, etc., from creditors and issuing stock to owners.

Cash Outflows from Financing Activities Uses

Cash paid for repayment of principal to creditors, repurchasing stock from owners, and dividends to owners.

Quality of Income Ratio

A higher ratio indicates greater ability to finance operating and other cash needs from operating cash inflows.

Free Cash Flow

Available for additional capital expenditures, investments in other companies, and mergers and acquisitions without the need for external financing or reductions in dividends to shareholders.