Chapter 12 - Statement of cash flows. After studying this chapter, you should be able to: Classify cash flow statement items as part of net cash flows from operating, investing, and financing activities; report and interpret cash flows from operating activities using the indirect method; analyze and interpret the quality of income ratio. | Chapter 12 statement of Cash Flows McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 12: Statement of Cash Flows Understanding the Business Positive cash flows permit a company to . . . Expand its operations. Replace needed assets. Take advantage of market opportunities. Pay dividends to owners. Wall Street analysts consider cash flow an important indicator of a company’s financial health. 12-2 Clearly, net income is important, but cash flow is also critical to a company’s success. Positive cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firm’s ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. Wall Street analysts consider cash flow an important indicator of a company’s financial health. Some Wall Street analysts go so far as to say “cash flow is king.” Cash Currency Cash Equivalents Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by interest rate changes (., original maturities of less than 3 months). Classifications of the Statement of Cash Flows 12-3 Basically, the statement of cash flows explains how the amount of cash on the balance sheet at the beginning of the period became the amount of cash reported at the end of the period. For purposes of this statement, the definition of cash includes cash and cash equivalents. Cash equivalents are short-term, highly liquid investments that are both 1. Readily convertible to known amounts of cash, and 2. So near to maturity there is little risk that their value will change if interest rates change. Generally, only . | Chapter 12 statement of Cash Flows McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 12: Statement of Cash Flows Understanding the Business Positive cash flows permit a company to . . . Expand its operations. Replace needed assets. Take advantage of market opportunities. Pay dividends to owners. Wall Street analysts consider cash flow an important indicator of a company’s financial health. 12-2 Clearly, net income is important, but cash flow is also critical to a company’s success. Positive cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Both managers and analysts need to understand the various sources and uses of cash that are associated with business activity. The statement of cash flows focuses attention on a firm’s ability to generate cash internally, its management of current assets and current liabilities, and the details of its
