Management Theory Review

● shows where cash came from (receipts) and exactly how cash was spent (obligations). ● reports why cash increased or decreased through the period. The statement of cash flows explains why the net gain as reported on the income statement does not equal the change in the cash balance. In essence, the cash flow declaration is the communicating link between the accrual-based income declaration and the cash reported on the balance sheet.

1. Predict future cash moves. Previous cash payments and receipts help forecast future cash moves. 2. Evaluate management decisions. Wise investment decisions help the business prosper, while unwise decisions cause the business to have problems. Investors and creditors use cash flow information to evaluate managers’ decisions. 3. Forecast ability to pay money and dividends. Lenders want to know whether they will gather on their loans.

Stockholders want dividends on their investments. The declaration of cash flows makes these predictions. On the declaration of cash flows, Cash means cash readily available and cash in the bank or investment company, and cash equivalents, that are highly liquid investments that may be converted into profit three months or less. As the name suggests, cash equivalents are so close to cash that they are treated as “equals.” Types of cash equivalents are money-market accounts and investments in U.S.

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Each section reviews cash flows getting into the company and cash flows moving away from the company predicated on these three divisions. ● The direct method restates the income statement in conditions of cash. The direct method shows all the cash receipts and everything the cash obligations from operating activities.

● use different computations but produce the same amount of cash flow from functions. ● present trading activities and funding activities in the same format exactly. Only the operating activities section is offered between the two methods differently. Operating cash flows begin with a net gain, extracted from the income statement. The declaration of cash flows-indirect method-begins with net income (or net reduction) because revenues and expenses, which affect net gain, produce cash and receipts payments. Revenues bring in cash receipts, and expenses must be paid. But the net gain as shown on the income declaration is accrual based and the money moves (cash basis net income) do not always equal the accrual basis income and expenditures.

For example, sales on accounts generate profits that increase net income, however the company has not collected cash from those sales yet. Accrued expenses decrease net gain, but the company has not paid cash if the expenses are accrued. To go from a net gain to cash flow from operations, some adjustments must be made by us to the net gain on the declaration of cash moves. These additions and subtractions follow net income and are labeling Adjustments to reconcile net income to net cash provided by operating activities.