И.Р.)Cash flow statementIn financial accounting, cash flow statement is a financial statement that shows how a company’s operating, investing and financing activities have affected cash during an accounting period. For the statement of cash flows, cash is defined as including both cash and cash-equivalents. (Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to cash; they have maturity of 90 days or less). Purposes of cash flow statement - to provide information about a firm’s cash receipts and cash payments during an accounting period. - to provide information about a firm’s operating, investing, and financing activities. Uses of cash flow statement Management uses the statement to assess liquidity, determine dividend policy, and plan investing and financing activities. Investors and creditors use it to assess the company’s cash-generating ability. The statement of cash flows has 3 major classifications: 1) Operating activities, which involve the cash effects of transaction and other events that enter into the determination of net income. 2) Investing activities, which involve the acquisition and sale of marketable securities and long-term assets and the making and collecting of loans. 3) Financing activities, which involve obtaining resources from stockholders and creditors and providing the former with a return on their investments and the latter with repayment. Analyzing cash flow statement While analyzing the statement of cash flows, analysts focus on cash-generating efficiency and Free Cash Flow. Cash-generating efficiency is a firm’s ability to generate cash from its current and continuing operations. The ratios used to measure cash-generating efficiency are: - Cash Flow Yield = net cash flows from operating activities/net income - Cash Flows to Sales = net cash flows from operating activities/sales) - Cash Flows to Assets = net cash flows from operating activities/average total assets). Free Cash Flow is the cash that remains after deducting the funds a firm must commit to continue operating at its planned level. These commitments include current and continuing operations, interest, income taxes, dividends, and capital expenditures. If Free Cash Flow is positive, it means that the company has met all of its planned cash commitments and has cash available to reduce debt or to expand. Accounting procedure There are two methods to determine cash flows from operating activities: - the direct method adjusts each item on the income statement from the accrual basis to the cash basis. - the indirect method takes as its starting point the profit or loss for the period (before tax) and then makes adjustments to reconcile net income to net cash flows from operating activities.
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