Statement of Cash Flow

1. Financial Statement Analysis:
Cash Flow Statement Analysis
Benazir Ishaque
Faculty Member, BIBM

2. Statement of Cash Flow
• Provides information about the cash inflows and
outflows of a company during a specific period.
• Is developed from Balance Sheet and Income
Statement Data
• Shows how changes in the company's balance sheet
accounts and income statement items affect its cash
and cash equivalents.

3. Importance of Cash Flow
• Liquidity Assessment
• Operational Efficiency
• Investment and Growth Opportunities
• Debt Service and Financial Stability
• Decision-Making and Planning
• Investor Confidence
• Risk Management

4. Information CF statement serves
o What use was made of the net income?
o Which sources were used to obtain funds?
o How much capital was generated internally?
o Is the dividend policy in balance with the long-term growth
objective of the firm?
o How much debt was paid off?
o How much capital was raised by issuing & selling new stocks?
o How much was raised in the form of debt capital?
o Why the payout ratio is too low or too high?
o How was the expansion in plant & equipment financed?

5. The statement is divided into three
main sections:
1. Operating Activities
2. Investing Activities
3. Financing Activities

6. 1. Operating Activities:
This section reports cash flows from the company's
primary business activities, such as-
• sales of goods or services
• payment to suppliers
• payment of salaries
• receipt of interest and dividends
It helps assess the company's ability to generate cash
from its core operations.
Cash received from
sales of goods and
services
Cash paid for
operating goods
and services
Cash flow from
operations

7. 2. Investing Activities:
This section reflects cash flows from the purchase or sale
of long-term assets, such as-
• property
• plant, and equipment
• investments in other companies
• proceeds from the sale of such assets
It provides insights into the company's investment
decisions.
Cash received from
sales of
ivestments,property,pla
nt and equipment etc.
Cash paid for acquisition
of investments,property,
plant and equipment
etc.
Cash flow from
investing

8. 2. Financing Activities:
his section includes cash flows from activities related to
the company's capital structure, such as-
• issuing or repurchasing shares
• obtaining or repaying loans
• payment of dividends
It provides insights into the company's investment
decisions.
Cash received from
issuing share capital or
debt and borrowing
Cash paid for dividend,
repaying short and long term
borrowing and reacquisition
of debt or capital stock
Cash flow from
financing

9. Steps to Prepare the Statement of
Cash Flow:
1.Determine the net increase / decrease in cash balance
2. Determine net cash provided/ used by operating
activities
3. Determine net cash provided/ used by investing and
financing activities.

10. • Calculate Cash Flows from Operating Activities: Analyze the
income statement and other operating activities to
identify cash inflows and outflows directly related to the
company's core operations.
• Typical cash inflows include customer payments from sale
of goods and services, interest received, and dividends
received.
• Typical cash outflows include payments to suppliers,
salaries and wages, interest paid, and income taxes paid.
• Adjust for Non-Cash Items: Remove any non-cash
transactions from the net income figure and adjust for
items such as depreciation, amortization, or changes in
working capital (e.g., changes in accounts receivable or
accounts payable).
• Summarize the Net Cash Flow from Operating Activities.

11. • Identify Cash Flows from Investing Activities: Review the
balance sheet and supporting documents to identify cash
inflows and outflows related to investments in long-term
assets or other entities.
• Typical cash inflows include proceeds from the sale of
property, plant, and equipment, or the sale of investments,
debt or equity securities, collection o principal on loans to
other entities.
• Typical cash outflows include cash payments for the
purchase of property, plant, and equipment, investments in
other entities like purchasing their debt or equity, to make
loan to other entities.
• Summarize the Net Cash Flow from Investing Activities.

12. • Determine Cash Flows from Financing Activities:
Examine the balance sheet and other records to
identify cash inflows and outflows related to
financing the company's operations and capital
structure.
• Typical cash inflows include proceeds from issuing
stocks or bonds or obtaining loans, sale of equity
securities
• Typical cash outflows include payment of dividends,
repurchase of stocks, or repayment of loans.
• Summarize the Net Cash Flow from Financing
Activities.

13. Sources of Information for preparation
of SCF
Information to prepare this statement usually
comes from three sources:
1) Comparative balance sheet.
2) Current income statement.
3) Additional information.
The SCF deals with cash receipts and payments, so
the accrual concept is not used in the
preparation of the SCF.

14. Methods for Preparing SCF:
a) The indirect method
b) The direct method
The only distinctive area between direct method and indirect method is
Cash Flow from Operating Activities. In indirect method increase in
current liabilities and decrease in current assets are added with net
operating profit, increase in current assets and decrease in current
liabilities are deducted from net operating profit. The indirect method is
used extensively in practice.

15. Format of Cash Flow Statement under indirect method
ABC Trading Ltd.
Statement of cash flows
For the year ended December 31,20....
Cash flows from operating activities
Net income 200000
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation expense 50000
Loss on disposal of equipment 5000
Decrease in accounts receivable 20000
Increase in inventory -20000
Increase in prepaid expenses -15000 40000
Net cash provided by operating activities 240000
Cash flows from investing activities
Purchase of property, plant and equipment -100000
Proceeds from sale of property, plant and equipment 40000
Interest received 5000
Dividends received 5000
Net cash used in investing activities -50000
Cash flows from financing activities
Proceeds from issue of share capital 80000
Repayment of Long-term Debt -50000
Dividends paid -30000
Net cash flow from financing activities 0
Net increase in cash and cash equivalents 190000
Cash and cash equivalents at beginning of period 100000
Cash and cash equivalents at end of period 290000

18. Additional Information:
• Propensity Company sold land with an original
cost of $10,000, for $14,800 cash.
• A new parcel of land was purchased for $20,000,
in exchange for a note payable.
• Plant assets were purchased for $40,000 cash.
• Propensity declared and paid a $440 cash
dividend to shareholders.
• Propensity issued common stock in exchange for
$45,000 cash.

22. Additional Information:
• that originally cost $30,000 were sold for
$47,500 cash.
• Investments were purchased for $50,000 cash.
• Plant assets were purchased for $66,000 cash.
• Cash dividends were declared and paid to
shareholders in the amount of $8,000.