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1、STATEMENTS OF CASH FLOWSWHY WE NEED TO PREPARE A CASH FLOW STATEMENT ?Thethreekeyfinancialstatements:Incomestatement,Balancesheet,CashflowstatementsThecashflowstatementisintendedto1.provideinformationonafirmsliquidityandsolvencyanditsabilitytochangecashflowsinfuturecircumstances2.provideadditionalin
2、formationforevaluatingchangesinassets,liabilitiesandequity3.improvethecomparabilityofdifferentfirmsoperatingperformancebyeliminatingtheeffectsofdifferentaccountingmethods4.indicatetheamount,timingandprobabilityoffuturecashflowsACCOUNTING CONVENTION AccrualsbasisCashbasisHistoricalinformation(account
3、ingperiods)ComparabilityDEFINITIONSCashCashonhandandinthedepositaccountsCashequivalentsCash equivalents are assets that are readily convertible into cash, such as money market holdings, short-term government bonds or Treasury bills, marketable securities and commercial paper. Cash equivalents are di
4、stinguished from other investments through their short-term existence; they mature within 3 months whereas short-term investments are 12 months or less, and long-term investments are any investments that mature in excess of 12 months. Another important condition a cash equivalent needs to satisfy is
5、 that the investment should have insignificant risk of change in value; thus, common stock cannot be considered a cash equivalent, but preferred stock acquired shortly before its redemption date can be.COMPONENTSThestatementofcashflowsisseparatedintothreesections:OperatingactivitiesInvestingactiviti
6、esFinancingactivitiesTWO METHODS OF PREPARING PART 1DirectmethodThedirectmethod,althoughlesspopular,isfavoredbymanyfinancialmanagersbecauseitreportsthesourceofcashinflowsandoutflowsdirectly,withoutthepotentiallyconfusingadjustmentstonetincome.Insteadofstartingwithareportednetincome,thedirectmethodan
7、alyzesthevarioustypesofoperatingactivitiesandcalculatesthetotalcashflowcreatedbyeachone.Beforebeginningthedirectmethod,allaccrualaccountsmustfirstbeconvertedtoacashfigure.THE DIRECT METHODThedirectmethodforcreatingacashflowstatementreportsmajorclassesofgrosscashreceiptsandpayments.Cash flows from op
8、erating activitiesCashreceiptsfromcustomersCashpaidtosuppliersandemployeesCashgeneratedfromoperations(sum)InterestpaidIncometaxespaidNetcashflowsfromoperatingactivitiesCash flows from investing activitiesCash flows from financing activitiesTWO METHODS OF PREPARING PART 2IndirectmethodPopularbecauseo
9、fitsrelativesimplicity,theindirectmethodhasyoustartwithafigurefornetincome(fromyourincomestatement)andhelpsyouadjustthisaccrualamountforanyitemsthatdonotaffectcashflows.Therearethreebasictypesofadjustments:revenuesandexpensesthatdonotinvolvecashinflowsoroutflows(e.g.,costallocationssuchasdepreciatio
10、nandamortization)gainsandlossesoneventsreportedinothersectionsofthestatementofcashflowsconversionsofcurrentoperatingassetsandliabilitiesfromtheaccrualtothecashbasisNote:Whendeterminingthechangeincurrentassetsdonotincludethecashandcashequivalentaccounts.PROCEDURESTaccountprocessingAnalyzingprocessing
11、WorksheetprocessingOPERATING ACTIVITIESThecashflowsfromoperatingactivitiessectioncomesfirstandtellsyouhowmuchcashthecompanygeneratedfromitscorebusiness.ReceiptsfromthesaleofgoodsorservicesReceiptsforthesaleofloans,debtorequityinstrumentsinatradingportfolioInterestreceivedonloansDividendsreceivedoneq
12、uitysecuritiesPaymentstosuppliersforgoodsandservicesPaymentstoemployeesoronbehalfofemployeesInterestpaymentsFORMULA FOR THE CASH FLOW FROM OPERATING ACTIVITIESProfitbeforetaxationandinterests-Investincome-Interestsexpense+Depreciation/Amortization/Provision-Inventories-Receivables+Payables+LossDispo
13、salofnon-currentassetsDeferredtax-Dividendspaid-InterestspaidINVESTING ACTIVITIESThis number shows how much money the company has received (or lost) from its investing activities. It includes money that the company has made (or lost) by investing its excess cash in different investments (stocks, bon
14、ds, etc), money the company has made (or lost) from buying or selling subsidiaries, and all the money the company has spent on its physical property, such as plants and equipment.theacquisition(purchase)ofnon-currentassetsTheproceeds(moneyreceived)fromthesaleofnon-currentassetsLoansmadetosuppliersor
15、receivedfromcustomersPaymentsrelatedtomergersandacquisitionsFINANCINGACTIVITIESPART1This is where the company reports the money that it took in and paid out in order to finance its activities. In other words, it calculates how much money the company spent or received from its stocks and bonds. This
16、includes any dividend payments that the company made to its shareholders, any money that it made by selling new shares of stock to the public, any money it spent buying back shares of its stock from the public, any money it borrowed, and any money it used to repay money it had previously borrowed.FI
17、NANCINGACTIVITIESPART2Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also
18、 listed in the financing activities section of the cash flow statement.Proceed of issuing sharesProceeds from issuing short-term or long-term debt Payments of dividends Payments for repurchase of company shares Repayment of debt principal, including capital leases For non-profit organizations, recei
19、pts of donor-restricted cash that is limited to long-term purposes Items under the financing activities section include:Dividends paid Sale or repurchase of the companys stock Net borrowings Payment of dividend tax THE FORTH PARTNetincreaseofcashandcashequivalentsCashandcashequivalentsamountinthebeg
20、inningoftheyearCashandcashequivalentsintheendingoftheyearDISCLOSURE OF CASH FLOW STATEMENTSThecomponentsanddefinitionsofcashandcashequivalentsAmounts and components in the balance sheet; the material cash and cash equivalents (have a big/huge par value) used by subsidiary companies or parent companyThecrucialfinancingactivitiesandinvestingactivitieswhichexchangedinnoncashbusinessConverting debt to equity; Leasing to purchase an asset; the interest expense and principal value of Convertible BondsPreparingacashflowsstatementswiththeindirectmethod
