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Cash flow analysis


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Published in: Economy & Finance, Business

Cash flow analysis

  1. 1. Name Div Roll NoGufran Siddiqui A 53Aabid Kalokhe a 20Shehzad Khan A 30Asif valsangkar a 61Farhan Ansari a 04Shoaib shaikh a 50Zeeshan azmi a 06
  2. 2.  Provides information about cash inflows and outflows during an accounting period Is developed from Balance Sheet and Income Statement data Important as an analytical tool
  3. 3.  Accrual-based accounting requires reporting revenues when earned and expenses when incurred – not when cash is exchanged. Explains the reasons for a change in cash. Reconciles net income with cash flow from operations. Valuation models used in financial analysis are often based on projections of future cash flows.
  4. 4. Four parts of a statement of cash flows: Cash Operating Activities Investing Activities Financing Activities
  5. 5.  Cash includes Cash and Cash-equivalents Cash Equivalents• Treasury bills maturing within 90 days or less.• Investment Funds• Foreign Currency on hand• Checking Account• Free Savings Account
  6. 6.  Cash flows related to selling goods and services; that is, the principle business of the firm. The cash effects of transactions and other events that enter into the determination of incomeExamples of Operating Activities Cash received from customers through sale of goods or services performed; Cash payments to suppliers or employees Cash payments for taxes and other expenses
  7. 7.  Acquiring/disposing of securities that are not cash equivalents Cash flows related to the acquisition or sale of non-current assets. Lending money/collecting on loansExamples of Investing Activities Cash received from sales of assets that are not held for the regular trading purposes such as sale of building; marketable securities such as trading and available for sale securities, and investments Cash payments to acquire property, plant, and equipment (PPE), other tangible or intangible assets, and other long-term assets Cash received from sale of, and paid for purchases of derivative instruments Loans extended to other companies and collection of such loans
  8. 8.  Borrowing from creditors/repaying the principal Obtaining resources from owners Providing owners with a return on investmentExamples of financing activities Cash received from issuing share capital Cash proceeds from issuing bonds, loans, notes, mortgages and other short or long-term borrowings Cash payments to shareholders to redeem existing shares- treasury stock Cash repayment of loans and other borrowings; and Cash payments to shareholders as dividends.
  9. 9. Operating Activities Investing Activities Financing Activities Total Inflows less Total Outflows =Change in cash for the accounting period
  10. 10. Cash received from Cash paid for cash flowOperations sale of goods - operating goods = from operations and services and services + or - Cash received from Cash paid to purchase cash flowInvesting sales of investments - long-term investments = from investing and longterm assets + or - Cash received from Cash paid for dividends and to cash flowFinancing issue of debt or - repay debt or to buy = from financing capital stock treasury stock = Net change in cash cash inflows cash outflows for the period
  11. 11. Firms may use one of two methodsprescribed by the IASB-FASB: Direct Method Indirect MethodThe two methods yield identical figures for net cash flow from operating activities because the underlying accounting concepts are the same.
  12. 12. Direct Method Shows Cash collections from customers Interest and dividends collected Other operating cash receipts Cash paid to suppliers and employees Interest paid Taxes paid Other operating cash payments
  13. 13. Cash Flow from Operating Activities : Direct Method Cash Flow from Operating Activities Amount Amount (Rs.) (Rs.)Cash Receipts from :Sales XXX XXXCommission & Fees XXXInterest Received XXXCash Payment for :Purchases XXX XXXPayments to and for employees XXXOperating Expenses XXXInterest Payments XXXDirect Taxes Paid XXX XXXNet Cash Flow from Operating Activities
  14. 14. Reconciliation of the accrual based and cash basedaccounting Indirect Method starts with Net Income and adjusts for  Deferrals  Accruals  Non-cash items, such as depreciation and amortization  Non-operating items, such as gains and losses on asset sales
  15. 15. Cash Flow from Operating Activities : Indirect Method Cash Flow from Operating Activities Amount Amount (Rs.) (Rs.)Net Profit before Tax xxxAdjustment for : Depreciation xxx Loss on Sale of Fixed Assets xxx Loss on revaluation xxx xxxOperating Profit before Working Capital Changes xxxAdjustment* for :Trade and other Receivables xxxInventories or Stocks xxx xxxTrade Payments or (Creditors and B/P) xxxCash Generated from OperationsInterest Paid xxx xxxTaxes Paid xxxNet Cash Flow from Operating Activities XXX
  16. 16. First StepLook at changes in balance sheet accounts from beginning to end of accounting period Next Step:Transfer the account changes to the appropriate area of a statement of cash flows
  17. 17. External Uses To assess the ability of a firm to manage cash flows To assess the ability of a firm to generate cash through its operations To assess the company’s ability to meet its obligations and its dividend policy To provide information about the effectiveness of the firm to convert its revenues to cash To provide information to estimate or anticipate the company’s need for additional financing
  18. 18. Internal uses Along side with cash budget Cash Flow Statement is used:  To assess liquidity ▪ Determine if short-term financing is necessary  To determine dividend policy ▪ Decide to distribute; or increase or decrease  To evaluate the investment and financing decisions
  19. 19.  Non-Cash Transactions are ignored. Not a Substitute for Income Statementt. Not a test of Total Financial Position. Historical in Nature.
  20. 20. Should, at a minimum cover the followingareas: Cash flow from operating activities Cash inflows Cash outflows
  21. 21.  Its an important analytical tool for creditors, investors and other users of financial statement data. Firm’s ability to generate cash flows in the future Firm’s capacity to meet cash obligations Firm’s future external financing needs Firm’s success in productively managing investing activities Firm’s effectiveness in implementing financing and investing strategies
  22. 22. Generating cash from operations is the preferred method for obtaining excess cash to finance: Capital expenditures and expansion Repayment of debt Payment of dividends
  23. 23. When analyzing the cash outflows, the analyst should consider the necessity of the outflow and how the outflow was financedGenerally, it is best to finance short-term assets with short-term debt and long-term assets with long-term debt or issuance of stock
  24. 24. Operating Investing Financing Change Activities Activities Activities in CashAirline $ 2,29 ( 1,210) 213 1,232Computer (25) 118 1 94Recreation 42 (26) (5) 11Retailer 1,068 332 (53) 1,347Semiconductor 14,823 (6,362) (9,544) (1,083)*Data from SEC website,