FIN 146 (Davy Denko) EXAM 2 STUDY
GUIDE LATEST UPDATED AND RATED A.
What are the real earnings?
Each individual user of financial statements should adjust the earnings figure
to reflect what is relevant to the decision at hand
Standard II(A) Material Nonpublic Information
Members and Candidates who possess material nonpublic information that
could affect the value of an investment must not act or cause others to act on
the information.
•Trading or inducing others to trade on material nonpublic information erodes
confidence in capital markets, institutions, and investment professionals by
supporting the idea that those with inside information and special access can
take unfair advantage of the general public.
Why is Cash Flow Important?
- It is possible for a company to post a healthy net income but not have cash
needed to pay its employees, suppliers, and bankers
- Positive net income on the income statement is ultimately insignificant unless
a company can translate its earnings into cash
Statement of Cash Flows
- Provides information about cash inflows and outflows during an accounting
period and overtime
- Extremely important analytical tool
- Cash flows are segregated by Operating, investing, and financing activities
Statement of Cash Flows Basic Principle
,Statement of cash flows is based on changes in the balance sheet accounts
- Balance sheet shows amounts at the end of the accounting period
- Statement of cash flows shows changes in the balance sheet accounts
between periods
- Change in cash between periods explained by changes in all other balance
sheet accounts
- Each balance sheet account related to an operating activity, an investing
activity, or a financing activity.
- represents the amount of cash income from operations
Preparing a Statement of Cash Flows
- Begins with a return to the balance sheet
- Requires reordering the information
- Shows changes in cash over time
Four Parts: Cash, Operating activities, investing activities, and financing
activities
Operating Activities Inflows
- Cash from sales of goods or services
- Returns on equity securities (dividends)
- Returns on interest-earning assets (interest)
Operating Activities Outflows:
- Payments for purchase of inventory
- Payments for operating expenses
- Payments for purchasing from suppliers other than inventory
- Payments to lenders (interest)
- Payments for taxes
Investing Activities Inflows:
, - Cash from sales of PP&E
- Cash collections from loans (principal) to others
- Cash from sales of debt or equity securities of other entities (except securities
traded as cash equivalents)
- Cash from sale of a business segment
Investing Activities Outflows:
- Purchases of PP&E
- Loans (principal) to others
- Purchases of debt or equity securities of other entities
Financing Activities Inflows:
- Proceeds from borrowing
- Proceeds from issuing the firm's own equity securities
Financing Activities Outflows:
- Repayments of debt principal
- Repurchase of a firm's own shares
- Payment of dividends
Inflow
- Asset account
+ Liability account
+ Equity account
Outflow
+ Asset account
- Liability account
- Equity account
Operating Activities Examples
GUIDE LATEST UPDATED AND RATED A.
What are the real earnings?
Each individual user of financial statements should adjust the earnings figure
to reflect what is relevant to the decision at hand
Standard II(A) Material Nonpublic Information
Members and Candidates who possess material nonpublic information that
could affect the value of an investment must not act or cause others to act on
the information.
•Trading or inducing others to trade on material nonpublic information erodes
confidence in capital markets, institutions, and investment professionals by
supporting the idea that those with inside information and special access can
take unfair advantage of the general public.
Why is Cash Flow Important?
- It is possible for a company to post a healthy net income but not have cash
needed to pay its employees, suppliers, and bankers
- Positive net income on the income statement is ultimately insignificant unless
a company can translate its earnings into cash
Statement of Cash Flows
- Provides information about cash inflows and outflows during an accounting
period and overtime
- Extremely important analytical tool
- Cash flows are segregated by Operating, investing, and financing activities
Statement of Cash Flows Basic Principle
,Statement of cash flows is based on changes in the balance sheet accounts
- Balance sheet shows amounts at the end of the accounting period
- Statement of cash flows shows changes in the balance sheet accounts
between periods
- Change in cash between periods explained by changes in all other balance
sheet accounts
- Each balance sheet account related to an operating activity, an investing
activity, or a financing activity.
- represents the amount of cash income from operations
Preparing a Statement of Cash Flows
- Begins with a return to the balance sheet
- Requires reordering the information
- Shows changes in cash over time
Four Parts: Cash, Operating activities, investing activities, and financing
activities
Operating Activities Inflows
- Cash from sales of goods or services
- Returns on equity securities (dividends)
- Returns on interest-earning assets (interest)
Operating Activities Outflows:
- Payments for purchase of inventory
- Payments for operating expenses
- Payments for purchasing from suppliers other than inventory
- Payments to lenders (interest)
- Payments for taxes
Investing Activities Inflows:
, - Cash from sales of PP&E
- Cash collections from loans (principal) to others
- Cash from sales of debt or equity securities of other entities (except securities
traded as cash equivalents)
- Cash from sale of a business segment
Investing Activities Outflows:
- Purchases of PP&E
- Loans (principal) to others
- Purchases of debt or equity securities of other entities
Financing Activities Inflows:
- Proceeds from borrowing
- Proceeds from issuing the firm's own equity securities
Financing Activities Outflows:
- Repayments of debt principal
- Repurchase of a firm's own shares
- Payment of dividends
Inflow
- Asset account
+ Liability account
+ Equity account
Outflow
+ Asset account
- Liability account
- Equity account
Operating Activities Examples
