Active learning ideas
The Statement of Cash Flows is a critical report that explains why a company's cash balance changed during the year. Students learn to use the indirect method, starting with net profit and adjusting for non-cash items and changes in working capital. This helps them understand the vital difference between 'profit' and 'cash'.
Activity 01
Students use 'cash tokens' to represent the flow of money. They start with profit and then add or subtract tokens based on changes in inventory, receivables, and payables to reach the final cash balance.
How does the inventory turnover rate reflect operational efficiency?
Activity 02
Provide a scenario of a company with a million-dollar profit but a negative cash balance. Pairs must brainstorm three reasons why this happened (e.g., high credit sales, large equipment purchase).
What does the debt-to-equity ratio reveal about a company's financial risk?
Activity 03
Post various transactions around the room (e.g., 'Paid dividends', 'Sold a van', 'Bought inventory'). Students rotate and tag each as Operating, Investing, or Financing activities.
How do efficiency and solvency interact to affect overall performance?
A few notes on teaching this unit
Watch Out for These Misconceptions
An increase in an asset (like inventory) is a cash inflow.
An increase in an asset actually represents a cash outflow (you spent cash to buy it). Using the 'Cash Flow Pipeline' helps students see that 'buying' more inventory uses up their cash tokens.
Depreciation is a cash payment.
Depreciation is a non-cash expense that was subtracted to find profit; therefore, it must be added back in the cash flow statement. Peer explanation of why we 'add back' depreciation helps clarify this logic.
Methods used in this brief
Profitability and Liquidity Ratios
Calculate and interpret key profitability and liquidity ratios to assess a company's financial health.
8 methodologies
Limitations of Financial Statement Analysis
Critically evaluate the limitations of relying solely on financial ratios for business decision-making.
8 methodologies