Cash flow analsis


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Cash flow analsis

  1. 1. Cash Flow Statement
  2. 2. Basic Concepts•CFS Reports the entity’s cashflows (cash receipts and cashpayments) during the period
  3. 3. Purposes of the Statementof Cash Flows•Predict future cash flows•Evaluate management decisions•Determine the ability to paydividends to stockholders andpayments to creditors•Show the relationship of net incometo the business’s cash flows
  4. 4. What is Cash?•Cash on hand•Cash in the bank•Cash equivalents - highly liquid,short-term investments that can beconverted into cash with little delay • Money-market investments • Government Treasury bills
  5. 5. Statement of Cash Flows Sections
  6. 6. Operating, Investing, andFinancing Activities•Operating activities createrevenues, expenses, gains, andlosses.•Investing activities increase anddecrease long-term assets.•Financing activities obtain cashfrom investors and creditors.
  7. 7. Two Formats forOperating Activities•Indirect method reconciles from netincome to net cash provided byoperating activities•Direct method reports all cashreceipts and cash payments fromoperating activities•The two methods have no effect oninvesting or financing activities.
  8. 8. Two Formats forOperating Activities Indirect MethodNet income$XXXAdjustments:Depreciation, etc.$XXXNet income provided by operating activities$XXX
  9. 9. Direct MethodCollection from customers$XXXDeductions:Payment to suppliers, etc.$ XXXNet income provided by operating activities $XXX
  10. 10. The Indirect Operating Section
  11. 11. Operating Activities Indirect MethodCash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided byoperating activities: + Depreciation/amortization expense + Loss on sale of long-term assets - Gain on sale of long-term assets - Increases in current assets other than cash + Decreases in current assets other than cash + Increases in current liabilities - Decreases in current liabilities Net cash provided by operating activities
  12. 12. Gain or Loss fromLong-Term Assets•Changes to Long-term Assets • Purchase or Sale • Effect Cash•They appear in the Investing Section•But... When Sold Are Reported on theIncome Statement • Thus, we need to reverse their effect • Add back the Loss • Subtract out the Gain
  13. 13. Operating Activities fromIndirect Method•Changes in current assets and current liabilityaccounts • Increase in current asset decreases cash • E.g. Purchase of Inventory for cash • Decrease in current asset increases cash • E.g. Collections of Accounts Receivable • Decrease in a current liability decreases cash • E.g. Payment of Accounts Payable • Increase in a current liability increases cash • E.g.Non-Cash Expense (Accrued Expense)
  14. 14. Decrease in Current AssetsIncreases Cash•If Accounts Receivable decreases thatmeans we collected Cash • That cash needs to be added back to Net Income•If Inventory, Supplies or other currentassets decrease that means we debitedan expense but did not credit Cash • So we add back those decreases to Net Income
  15. 15. The Indirect Method:Operating Activities Positive Items Net income Depreciation/amortization Loss on sale of long-term assets Decreases in current assets other than cash Increases in current liabilities Net loss Negative Items Gain on sale of long-term assets Increases in current assets other than cash Decreases in current liabilities
  16. 16. The Indirect Method: Investing Activities Positive ItemsSale of plant assetsSale of investments that are not cashequivalentsCollections of loans receivable Negative ItemsAcquisition of plant assetsPurchase of investments that are not cash equivalentsMaking loans to others
  17. 17. The Indirect Method:Financing Activities Positive Items Issuing stock Selling treasury stock Borrowing money Negative Items Payment of dividends Purchase of treasury stock Payment of principal amounts of debts
  18. 18. Proforma Of CFSC.F.O.A. $ XXXC.F.F.A. $ XXXC.F.I.A. $ XXX Total $ XXX