Financial statements nomenclature and interpretation

1. FINANCIAL
STATEMENTS
NOMENCLATURE AND
INTERPRETATION
M A . J O A N A G . B A R R I O N

2. CASH FLOW
STATEMENT

3. CASH FLOW STATEMENT
The Statement of Cash Flows (also referred to as the
cash flow statement) is one of the three key financial
statements that reports the cash generated and spent
during a specific period of time (i.e., a month, quarter,
or year). The statement of cash flows acts as a bridge
between the income statement and balance sheet by
showing how money moved in and out of the
business.

4. Statement of Cash Flows presents the movement in cash and cash
equivalents over the period.
Cash and cash equivalents generally consist of the following:
• Cash on hand
• Cash in bank
• Short term investments that are highly liquid and involve very low risk of
change in value
• Bank overdrafts in cases where they comprise an integral element of the
organization's treasury management

6. OPERATING ACTIVITIES
Operating activities are the principal revenue-producing
activities of the entity.
Operating activities include
• generating revenue
• paying expenses
• funding working capital.

7. It is calculated by taking a company’s (1) net income, (2) adjusting for non-cash items,
and (3) accounting for changes in working capital.
Cash Flow from Operations = Net Income + Non-Cash Items + Increase in Working Capital

8. The company’s chief finance officer chooses between the direct and indirect presentation
of operating cash flow:
• Direct presentation: Operating cash flows are presented as a list of cash flows; cash in
from sales, cash out for purchases, etc.
• Indirect presentation: Operating cash flows are presented as a reconciliation from
profit to cash flow:
Profit P
Depreciation D
Amortization A
Impairment expense I
Change in working capital ΔWC
Change in provisions ΔP
Interest Tax (I)
Tax (T)
Operating cash flow OCF

10. EXAMPLE:

11. INVESTING CASH FLOW
• Cash Flow from Investing Activities includes the acquisition and disposal
of non-current assets and other investments not included in cash
equivalents. Investing cash flows typically include the cash flows
associated with buying or selling property, plant, and equipment (PP&E),
other non-current assets, and other financial assets.
• Cash spent on purchasing PP&E is called capital expenditures (or CapEx
for short).

13. Investing Activities Include:
• Purchase of property plant and equipment (PP&E) –
a.k.a. capital expenditures
• Proceeds from the sale of PP&E
• Acquisitions of other businesses or companies
• Proceeds from the sale of other businesses (divestitures)
• Purchases of marketable securities (i.e. stocks, bonds, etc.)
• Proceeds from the sale of marketable securities

14. EXAMPLE:

15. FINANCING CASH FLOW
Cash Flow from Financing Activities are activities that result in changes in
the size and composition of the equity capital or borrowings of the entity.
Financing cash flows typically include cash flows associated with
borrowing and repaying bank loans, and issuing and buying back shares.
The payment of a dividend is also treated as a financing cash flow.

17. Financing activities include:
• Issuance of equity
• Repayment of equity
• Payment of dividends
• Issuance of debt
• Repayment of debt
• Capital/finance lease payments

18. EXAMPLE:

19. WHAT CAN THE STATEMENT OF CASH
FLOWS TELL US?
• The Cash Flow Statement shows how a company raised money (cash) and how it spent those
funds during a given period.
• If cash from operating activities is higher than net income, earnings are said to be of “high
quality.”
• It allows investors to get an overall sense of the company’s cash inflows and outflows and obtain
a general understanding of its overall performance.
• If a company is funding losses from operations or financing investments by raising money (debt
or equity) it will quickly become clear on the statement of cash flows

20. STATEMENT OF
CHANGES IN EQUIT Y

21. STATEMENT OF CHANGES IN EQUITY
• Statement of Changes in Equity is a reconciliation of the beginning and
ending balances in a company’s equity during a reporting period.

22. DIFFERENT FORMS OF EQUITY
• For sole proprietorship business, equity is known as owner’s equity or owner’s capital.
• For partnership, it is known as partners’ equity.
• For stock corporations, the appropriate term is stockholders’ equity or shareholders’
equity.

23. MAIN ELEMENTS:
• Net profit or loss attributed to shareholders.
• A decrease or an increase in share capital reserves.
• The dividend payments made to shareholders.
• Any changes in accounting policy.
• Any corrections of prior period errors.

24. COMPONENTS
• Opening Balance
• Effect of Changes in Accounting Policies
• Effect of Correction of Prior Period Error
• Restated Balance
• Changes in Share Capital
• Dividends
• Income / Loss for the period
• Changes in Revaluation Reserve
• Other Gains & Losses
• Closing Balance

25. EXAMPLE:

26. WHAT CAN THE STATEMENT OF
CHANGES IN EQUITY TELL US?
• A statement of changes in equity generally shows the movements of equity in addition
to accumulated earnings and losses so as to enable the shareholders to depict on the
sources (where it came from) and outlets of equity (where did it go).