FINANCIAL MANAGEMENT PART 3

1. Cash Flows and Financial Analysis Chapter 3

8. How the Statement of Cash Flows Works—Preliminary Examples Q: Suppose Joe Jones has after-tax income of $50,000 and spends $40,000 on normal living expenses during the year. Also assume that at the beginning of the year he had a bank balance of $10,000 and no other assets or liabilities. Further, assume that during the year he bought a new car costing $30,000, financing $25,000 at the bank with a car loan. At the end of the year he has $15,000 in the bank. Generate a Statement of Cash Flows for Joe. A: Inflows of cash are known as sources and outflows are known as uses. The Statement of Cash Flows will show how Joe ended up with $15,000 in his bank account. Joe generated a net source of cash of $10,000, or the difference between his income and normal living expenses. He also experienced an inflow of $25,000 from the car loan and used $30,000 to buy the car. Thus, Joe’s Statement of Cash Flows is: Example

9. How the Statement of Cash Flows Works—Preliminary Examples Example $15,000 Ending cash balance $5,000 Net cash flow $10,000 Beginning cash balance $5,000 Net inflow/(outflow) of cash ($30,000) Use of cash to buy auto (40,000) $50,000 $25,000 Source of cash from loan $10,000 Net source of cash from income Cash used on living expenses Cash income

12. Figure 3.2: Business Cash Flows A successful business has to withdraw cash to finance growth and replace worn out assets, pay taxes and for profit.

13. Figure 3.3: The Cash Conversion Cycle Product is converted into cash, which is transformed into more product, creating the cash conversion cycle.

14. Constructing the Statement of Cash Flows Also assume firm paid a $500 dividend and sold stock for $800 during the year.

21. Constructing the Statement of Cash Flows While the firm was profitable it still had to borrow money and sale stock to finance the increase in Fixed Assets.

26. Common Size Statements