Cash flow


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Cash flow

  1. 1. CASH FLOW Ms Rosmin Iqbal Hussain BOptom (UKM), CMBA (UNIMAS)
  2. 2. The Statement of Cash Flows <ul><li>One of the three basic objectives of financial reporting is </li></ul><ul><li>“ assessing the amounts, timing, and uncertainty of cash flows.” </li></ul>
  3. 3. Purpose of the Statement <ul><li>To provide relevant information about the cash receipts and cash payments of an enterprise during a period. </li></ul><ul><li>The statement provides answers to the following questions: </li></ul><ul><ul><li>Where did the cash come from? </li></ul></ul><ul><ul><li>What was the cash used for? </li></ul></ul><ul><ul><li>What was the change in the cash balance? </li></ul></ul>
  4. 4. Need for Cash Flow Statement <ul><li>To ensure: </li></ul><ul><ul><li>That sufficient profits are made to finance the business activities </li></ul></ul><ul><ul><li>Sufficient cash funds are available as and when needed </li></ul></ul>
  5. 5. Content and Format <ul><li>Three different activities: </li></ul><ul><ul><li>Operating, </li></ul></ul><ul><ul><li>Investing, </li></ul></ul><ul><ul><li>Financing </li></ul></ul>
  6. 6. Content and Format Operating Cash inflows and outflows from operations. Investing Cash inflows and outflows from non-current assets. Financing Cash inflows and outflows from non-current liabilities and equity. The statement’s value is that it helps users evaluate liquidity, solvency, and financial flexibility. What does +ve / -ve value in each indicate?
  7. 7. Standard Layout of the Cash Flow Statement
  8. 8. Preparation <ul><li>Information obtained from several sources: </li></ul><ul><li>(1) comparative balance sheets, </li></ul><ul><li>(2) the current income statement, and </li></ul><ul><li>(3) selected transaction data (e.g bank acct) </li></ul>
  9. 9. Where from: Where to?
  10. 10. Statement of Cash Flow Cash flow from Ct (acct receivables) 1070,000 O Cash pd to supplier (acct payables)/ employees (expenses) 980,000 O Tax paid 10,000 O Purchase of equipment 8,000 I Proceeds from notes payables 20,000 F Dividends paid 5,000 F Interest paid 10,000 F Cash balance beginning of the year (bank opening balance in the beginning of the month) 63,000
  11. 11. Statement Of Cash Flow for the year ended 31 December 20X6 Cash Flow from Operating Activity Cash from customer Cash paid to supplier/employees Tax paid Cash Flow from operating activities Cash Flow from Investing Activity Purchase of equipment Cash Flow from Financing Activity Proceeds from notes payables Dividends paid Interest paid Cash Flow from financing activities Nett Increase in cash & cash equivalent Cash & cash equivalents at beginning of the year Cash & cash equivalents at end of the year Bank balances and cash 1070,000 (980,00) (10,000) 80,000 (8,000) 20,000 (5,000) (10,000) 5,000 77,000 63,000 140,000
  12. 12. Review <ul><li>In preparing a statement of cash flows, which of the following transactions would be considered an investing activity? </li></ul><ul><li>a. Sale of equipment at book value </li></ul><ul><li>b. Sale of merchandise (product) on credit </li></ul><ul><li>c. Declaration of a cash dividend </li></ul><ul><li>d. Issuance of bonds payable at a discount receivable </li></ul>
  13. 13. Usefulness of the Statement of Cash Flows <ul><ul><li>High amount - company able to generate sufficient cash to pay its bills. </li></ul></ul><ul><ul><li>Low amount - company may have to borrow or issue equity securities to pay bills </li></ul></ul>Without cash, a company will not survive. Cash flow from Operations:
  14. 14. Usefulness of the Statement of Cash Flows Ratio indicates whether the company can pay off its current liabilities from its operations. A ratio near 1:1 is good. Financial Liquidity Net Cash Provided by Operating Activities Average Current Liabilities Current Cash Debt Coverage Ratio =
  15. 15. Usefulness of the Statement of Cash Flows The amount of discretionary cash flow a company has & thus is able to use it for purchasing additional investments, retiring its debt, purchasing treasury stock, or simply adding to its liquidity Free Cash Flow
  16. 16. Review The current cash debt coverage ratio is often used to assess a. financial flexibility. b. liquidity. c. profitability. d. solvency.