fame9

STUDY UNIT NINE

1. Cash equivalent – short-term investments with original maturities of three months or less that are readily convertible to cash and whose value is unlikely to change (e.g., Treasury bills, commercial paper, money market funds, etc.).

2. Cash flow from operations ratio – measures an organization’s ability to meet its current liabilities. The ratio divides cash flow from operations by current liabilities.

3. Financing activities, cash flow from – cash inflows and outflows that detail the extent and nature of an organization’s external financing for the enterprise (requires analysis of all changes in noncurrent liabilities and owners’ equity accounts).

4. Investing activities, cash flow from – cash inflows and outflows that detail an organization’s investment in noncurrent assets and the change in cash related to the acquisition or sale of productive facilities and investments in the securities of other companies (i.e., noncurrent asset accounts).

5. Liquidity – availability of cash to pay the organization's liabilities as they become due. For an individual asset, liquidity is measured by the time it will take to convert the asset to cash or is sold or consumed. The easier and faster an asset can be converted to cash, the more liquid it is.

6. Liquidity of net income ratio – measures the liquidity of an organization. The ratio divides total cash flow from operations (operating, investing, and financing activities) by net income.

7. Operating activities, cash flow from – cash inflows and outflows from current operations of the enterprise.

1. Under the direct method, the components of cash flows from operating activities are listed as gross receipts and gross payments, with net cash flow as the difference between them.

2. Under the indirect method, the cash flows from operating activities include net income adjusted for noncash items, such as depreciation (which arise from noncurrent assets and liabilities), and changes in current assets and current liabilities.

3. Either method used will result in the same net cash flow from operating activities.

8. Quality of income ratio – measures the portion of income that was generated in cash. The ratio divides cash flow from operating activities by net income.

9. Statement of cash flows – explains the change in the cash balance from the beginning of the accounting period to the end of the accounting period in terms of the cash flows from operating activities, investing activities, and financing activities.