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chapter 16
Financial
Analysis and the Statement of Cash Flows
goals discussion
goals achievement
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multiple
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check list and key terms
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
Know the liquidity and debt service ratios: Current ratio, quick ratio, debt to total assets, debt to total equity, and times interest earned.
Know the turnover ratios: Accounts receivable turnover and inventory turnover.
Know the profitability ratios: Net profit on sales, gross profit margin, return on assets, and return on equity.
Know the other indicators: EPS, P/E, dividend rate/yield, dividend payout ratio, and book value per share.
Understand the importance of monitoring trends in the relationships between various financial statement components.
What is the purpose of a statement of cash flows?
What three categories make up the major body of the statement of cash flows, and what other information is to be presented?
Define the form and content of the operating activities section.
Define the form and content of the investing activities section.
Define the form and content of the financing activities section.
Identify investing and financing activities that do not affect cash.
What is a cash equivalent, how it classified on the balance sheet, and of what significance are cash equivalents to the preparation of a statement of cash flows?
Be able to prepare a statement of cash flows under both the direct and indirect approaches.
Be able to calculate cash received from customers, cash payments for merchandise, cash payments for selling and administrative expenses, and cash payments for interest and income taxes, using the logic expressed in the formulas given.
What items found on an income statement tend to be ignored in the preparation of a statement of cash flows?
Specifically, how are noncash expenses and nonoperating gains and losses dealt with in the preparation of a statement of cash flows prepared under the indirect approach?
Why must current assets and current liabilities be examined to successfully complete a statement of cash flows prepared via the indirect approach?
Summarize the steps needed to prepare a statement of cash flows, and provide examples of the appropriate procedures.
Discuss things that a financial statement user might discern by reference to a statement of cash flows.
Understand the importance of the statement of cash flows in providing information about the possibility of business failure, insolvency, and bankruptcy.
Fully understand the mechanics of a work sheet for preparing the statement of cash flows.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| 16 | direct approach | The preferred method for preparing the statement of cash flows; operating cash flows are presented according to their direct source (e.g., cash received from customers) |
| 16 | financing activities | A cash flow category; including receipts from stock issues, bonds, notes and loans, -- and payments for loan repayment, acquisitions of treasury stock, and dividend distributions |
| 16 | indirect approach | An alternative method for preparing the statement of cash flows; operating cash flows are presented as a reconciliation of income to cash from operating activities |
| 16 | investing activities | A cash flow category; including receipts from disposal of investments and long-term assets -- and payments to acquire long-term assets and investments |
| 16 | operating activities | A cash flow category; generally related to transactions that enter into the determination of income -- items that are not investing or financing |
| 16 | statement of cash flows | A financial statement that summarizes the cash flows relating to operating, investing, financing, and noncash investing/financing activities of an entity |