WGU C214 Financial Managment Topic 3
Statement of Cash Flows (SCF)
Cash from Operation (CFO)
Cash from investing (CFI)
Cash from financing (CFF)
- cash flow reveals the true health of a company;
- explains cash in & cash out from operations (CFO), investing & financing for a given year.
CFO + CFI + CFF = change in cash= ending cash - beginning cash
-line items on the cash flow statement serve to show why & where the increase occurred & what type of
activity (i.e., operating, investing, or financing) caused it.
Operational
- decisions on what to produce, how to produce it, whom to sell it to, whom to use for suppliers
- CFO measures the net cash impact of operating decisions
Investing
- decisions on purchasing & selling of long term assets such as conveyor belts or the construction of new
production facilities
- CFI measures the net cash impact of investing decisions.
Financing
decision on issuance of debt & equity, repayment of debts, repurchasing stock & payment of dividends
- CFF measures the NET CASH IMPACT of financing decisions.
Core activities
- firm's core activities will impact the way cash flows are categorized
-
Cash flow management
- some managers will "manage" (increase/decrease) reporting of cash flows
- For instance, a manager whose bonus is impacted by CFO may be tempted to recategorize some items
to make CFO appear larger.
, Market pressure
- pressures to manipulate cash flow categorization in the market place
- For instance, a firm that is in the process of raising capital does NOT want to show a decrease in CFO.
Hence, managers may be willing to use their discretion over accounting choices to increase the reported
level of CFO.
Differences in CFO & Net Income
CFO includes all cash flows related to producing & selling the firm's product, such as cash coming in from
customers, cash flowing out for raw materials & operating expenses, & cash flowing out for taxes.
1. revenue is not the same as cash collected from sales because of changes in accounts receivable (AR)
2. gains/losses are only seen in net income
3. depreciation is only seen in net income
Calculating CFO from balance sheet
Net income + non-cash expenses (depreciation) + decrease in operating asset accounts (other than cash)
- increase in operating asset accounts (other than cash) + increase in operating liability accounts (other
than notes payable) - decrease in operating liability accounts (other than notes payable)
CFO=
= NI + depreciation expense + changes in operating accounts
±
changes in operating assets (Note: add decreases and subtract increases)
±
changes in operating liability accounts (Note: add increases and subtract decrease)
A change in notes payable will impact CFO.
FALSE
* Solution: A change in notes payable will NOT impact CFO (Note: notes payable is a financing variable;
hence, changes in notes payable impact CFF).
Operating asset accounts
* Increase = an outflow of cash
* Decrease = an inflow of cash
Operating liability accounts (e.g., accounts payable and accrued wages) are
*Increases = an inflow of cash
*Decreases = an outflow of cash
Statement of Cash Flows (SCF)
Cash from Operation (CFO)
Cash from investing (CFI)
Cash from financing (CFF)
- cash flow reveals the true health of a company;
- explains cash in & cash out from operations (CFO), investing & financing for a given year.
CFO + CFI + CFF = change in cash= ending cash - beginning cash
-line items on the cash flow statement serve to show why & where the increase occurred & what type of
activity (i.e., operating, investing, or financing) caused it.
Operational
- decisions on what to produce, how to produce it, whom to sell it to, whom to use for suppliers
- CFO measures the net cash impact of operating decisions
Investing
- decisions on purchasing & selling of long term assets such as conveyor belts or the construction of new
production facilities
- CFI measures the net cash impact of investing decisions.
Financing
decision on issuance of debt & equity, repayment of debts, repurchasing stock & payment of dividends
- CFF measures the NET CASH IMPACT of financing decisions.
Core activities
- firm's core activities will impact the way cash flows are categorized
-
Cash flow management
- some managers will "manage" (increase/decrease) reporting of cash flows
- For instance, a manager whose bonus is impacted by CFO may be tempted to recategorize some items
to make CFO appear larger.
, Market pressure
- pressures to manipulate cash flow categorization in the market place
- For instance, a firm that is in the process of raising capital does NOT want to show a decrease in CFO.
Hence, managers may be willing to use their discretion over accounting choices to increase the reported
level of CFO.
Differences in CFO & Net Income
CFO includes all cash flows related to producing & selling the firm's product, such as cash coming in from
customers, cash flowing out for raw materials & operating expenses, & cash flowing out for taxes.
1. revenue is not the same as cash collected from sales because of changes in accounts receivable (AR)
2. gains/losses are only seen in net income
3. depreciation is only seen in net income
Calculating CFO from balance sheet
Net income + non-cash expenses (depreciation) + decrease in operating asset accounts (other than cash)
- increase in operating asset accounts (other than cash) + increase in operating liability accounts (other
than notes payable) - decrease in operating liability accounts (other than notes payable)
CFO=
= NI + depreciation expense + changes in operating accounts
±
changes in operating assets (Note: add decreases and subtract increases)
±
changes in operating liability accounts (Note: add increases and subtract decrease)
A change in notes payable will impact CFO.
FALSE
* Solution: A change in notes payable will NOT impact CFO (Note: notes payable is a financing variable;
hence, changes in notes payable impact CFF).
Operating asset accounts
* Increase = an outflow of cash
* Decrease = an inflow of cash
Operating liability accounts (e.g., accounts payable and accrued wages) are
*Increases = an inflow of cash
*Decreases = an outflow of cash
