Presentation of Issues in Cash Flow Analysis Presented By: Submitted To: Group D Dr.Devendra Singh PGDM/A
Cash flow statement In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.
As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements.
People and groups interested in cash flow statements include: Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses Potential lenders or creditors, who want a clear picture of a company's ability to repay Potential investors, who need to judge whether the company is financially sound
Contd… Potential employees or contractors, who need to know whether the company will be able to afford compensation Shareholders of the business.
The cash flow statement is intended to provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances provide additional information for evaluating changes in assets, liabilities and equity improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods indicate the amount, timing and probability of future cash flows
The cash flow statement has been adopted as a standard financial statement because it eliminates allocations, which might be derived from different accounting methods, such as various timeframes for depreciating fixed assets.
Overview of the Statement of Cash Flows The statement of cash flows … (a) explains the reasons for a change in cash. (b) classifies the reasons for the change as an operating, investing or financing activity. (c) reconciles net income with cash flow from operations.
Define the Three Classifications of Cash Flows 1.Operations – cash flows related to production,sellinggoods and services; that is, the principle business of the firm. 2. Investing – cash flows related to the acquisition or sale of noncurrent assets. 3. Financing – long term and short term cash flows related to liabilities and owners’ equity; dividends are a financing cash outflow.
operating cash flows include Receipts from the sale of goods or services Receipts for the sale of loans, debt or equity instruments in a trading portfolio Interest received on loans Dividends received on equity securities Payments to suppliers for goods and services Payments to employees or on behalf of employees Interest payments (alternatively, this can be reported under financing activities in IAS 7, and US GAAP)
Examples of Investing activities are Purchase of an asset (assets can be land, building, equipment, marketable securities, etc.) Loans made to suppliers or customers
Financing activities include Proceeds from issuing short-term or long-term debt Payments of dividends Payments for repurchase of company shares Repayment of debt principal, including capital leases For non-profit organizations, receipts of donor-restricted cash that is limited to long-term purposes
Components of the Statement of Cash Flows Cash received from sale of goods and services Cash paid for operating goods and services cash flow from operations - = Operation Investing financing + - cash flow from investing Cash received from sales of investments and PP&E Cash paid for ac- quisition of invest- ments and PP&E - = + - Cash paid for dividends and reacquisition of debt or capital stock Cash received from issue of debt or capital stock cash flow from financing - = = Net change in cash for the period
Changes in Specific Accounts Non-cash assets Liability & Share- Holder’s equity increase decrease If noncash assets are increased, then cash was spent, so cash is an outflow, so negative sign. If noncash assets are decreased, then they provided cash so cash is an inflow, so positive sign. If liab. or S.E. increased, then cash was obtained, so cash is an inflow, so positive sign. If liab. or S.E. decreased, then cash was spent, so cash is an outflow, so negative sign.
Preparation methods Indirect method Direct method
DIRECT METHODCash flows from (used in) operating activities
Cash flows from (used in) investing activities Cash flows from (used in) financing activities
Indirect method Citigroup Cash Flow Statement Operating activities, cash flows provided by or used in:
Investing activities, cash flows provided by or used in:
Comparison of Cash Flow to Net Income Net income is an accrual based concept and purports to show the long-term. Cash flows purport to show the short term. Consider the outlook for both short-term and long-term and consider that each is either good or poor. A strong growing firm would show both good long-term and good short-term outlooks.
Contd… A failing firm would show both poor long-term and poor short term outlooks. What about a firm with good cash flows (short-term) but poor net income (long-term)? What about a firm with poor cash flows (short-term) but good net) income (long-term?
Issues To Cash Flow Analysis Time horizon for analysis of cash flow Biases in cash flow statements Time Value Of Money
Biases in cash flow statements As a cash flows have to be forecast far into the future, errors in estimation are bound to occur. Yet, given the critical importance of cash flow forecasts in projects evaluation, adequate care should be take to guard certain biases which may lead to overstatement or understatement of the true project profitability