Examples of cash outflow in the following topics:
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- Start by calculating Net Cash Flow for each year: Net Cash Flow Year 1 = Cash Inflow Year 1 - Cash Outflow Year 1.
- First, the sum of all of the cash outflows is calculated.
- The modified payback period is calculated as the moment in which the cumulative positive cash flow exceeds the total cash outflow.
- The sum of all cash outflows = 1000 + 5000 + 6000 = 12000.
- The modified payback period is in year 5, since the cumulative positive cash flows (17000) exceeds the total cash outflows (12000) in year 5.
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- Net Present Value (NPV) is the sum of the present values of the cash inflows and outflows.
- Every investment includes cash outflows and cash inflows.
- In order to see whether the cash outflows are less than the cash inflows (i.e., the investment earns a positive return), the investor aggregates the cash flows.
- Thus, in order to sum the cash inflows and outflows, each cash flow must be discounted to a common point in time.
- Don't forget that inflows and outflows have opposite signs; outflows are negative.
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- Cash flows due to changes in non-current assets or returns on investments must be determined to be inflows or outflows in order to be reported properly.
- When reporting investing activities, it is important to be able to decipher a cash inflow from a cash outflow.
- Examples of transactions involving cash inflows include:
- In each of these cases, the account appropriate to the specific investment would be debited, and the Cash account would be credited, due to the decrease in cash.
- The sale of a factory would be an example of a cash inflow from investment.
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- One of the components of the cash flow statement is the cash flow from investing .
- However, this cash flow is not representative of an investing activity on the part of the company.
- Cash outflow from the purchase of an asset (land, building, equipment, etc.).
- Cash inflow resulting dividends paid on stock owned in another company.
- It is important to remember that, as with all cash flows, an investing activity only appears on the cash flow statement if there is an immediate exchange of cash.
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- Payback period analysis ignores the time value of money and the value of cash flows in future periods.
- Additional complexity arises when the cash flow changes sign several times (i.e., it contains outflows in the midst or at the end of the project lifetime).
- First, the sum of all of the cash outflows is calculated.
- Then the cumulative positive cash flows are determined for each period.
- The modified payback period is calculated as the moment in which the cumulative positive cash flow exceeds the total cash outflow.
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- The NPV Profile assumes that all cash flows are discounted at the same rate.
- While this is not necessarily true for all investments, it can happen because outflows generally occur before the inflows.
- A higher discount rate places more emphasis on earlier cash flows, which are generally the outflows.
- When the value of the outflows is greater than the inflows, the NPV is negative.
- And it is the discount rate at which the value of the cash inflows equals the value of the cash outflows.
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- There can also be a disclosure of non-cash activities.
- Essentially, the cash flow statement is concerned with the flow of cash in and out of the business.
- For businesses that use cash basis accounting, the cash flow statement and income statement provide the same information, since cash inflows are considered income and cash outflows consist of expense payments or other types of payments (i.e. asset purchases).
- Financing activities include the inflow of cash from investors, such as banks and shareholders and the outflow of cash to shareholders as dividends as the company generates income.
- Statement of cash flows includes cash flows from operating, financing and investing activities.
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- The operating cash flows component of the cash flow statement refers to all cash flows that have to do with the actual operations of the business.
- The direct method shows the cash inflows and outflows affecting all current asset and liability accounts, which largely make up most of the current operations of the entity.
- The most noticeable cash inflow is cash paid by customers.
- It is only when the company collects cash from customers that it has a cash flow.
- Significant cash outflows are salaries paid to employees and purchases of supplies.
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- Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income.
- Receiving the money is a positive cash flow because cash is flowing into the company, while each individual payment is a negative cash flow.
- Exchanging non-cash assets or liabilities for other non-cash assets or liabilities; and
- Include as outflows reductions of long term notes payable (as would represent the cash repayment of debt on the balance sheet),
- Include as outflows all dividends paid by the entity to outside parties.
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- The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments.
- As a cash flow statement is based on the cash basis of accounting, it ignores the basic accounting concept of accrual.
- Cash flow statements are not suitable for judging the profitability of a firm, as non-cash charges are ignored while calculating cash flows from operating activities.
- The statement of cash flows includes cash flows from operating, investing and financing activities.
- Identify the factors that make the statement of cash flows of limited use