1. The document discusses the cash flow statement, which presents information about a company's cash flows from operating, investing, and financing activities. It explains the usefulness of cash flow information and the relationship between cash flows and profits.
2. The cash flow statement is prepared using either the direct or indirect method. The direct method shows actual cash inflows and outflows, while the indirect method reconciles net income to cash flows from operations. Cash flows from investing and financing activities are also presented.
3. Effective management of working capital and the appropriate mix of short-term versus long-term financing of current assets is important for business liquidity and performance. The document discusses various principles and policies for working capital management.
This presentation provides an overview of the goals and expected results of financial analysis. Typical ratios, financial account red flags and signs of financial shenanigans are listed as well.
This presentation provides an overview of the goals and expected results of financial analysis. Typical ratios, financial account red flags and signs of financial shenanigans are listed as well.
FFA- Statement of Schedule of Changes in Working Capitaluma reur
Statement Of Schedule Of Changes In Working Capital
This statement is prepared with the help of current assets and current liabilities relating to two different periods.
An increase or decrease in respect of each of such items should be recorded to ascertain the net increase or decrease in the working capital.
An increase in the value of current assets between two different periods indicates an increase in the working capital. It is an application of funds.
An increase in the value of current liabilities between two different periods indicates decrease in the working capital. It is sources of funds.
Cash flow is the flow of money in and out of the business. Managing your cash flow is vital for business survival and growth, even if you have existing cost savings programs in your organization.
The impact of disasters such as COVID-19 has driven the global economy into a recession and many businesses are only just trying to survive. Before taking drastic actions such as cutting salaries and staff, you might want to review your current cash flow performance to stem unnecessary cash outflow and eliminate waste in your processes.
To run your business effectively, you need to balance the timing and amount of your expenses with those of your income. This training presentation explains the various areas you need to consider when managing and improving cash flow in your business.
LEARNING OBJECTIVES:
1. Explain what cash flow means
2. Understand the cash flow cycle and importance of cash flow to a business
3. Identify major causes of cash flow problems
4. Define strategies to improve cash flow
5. Gain knowledge on eliminating waste to improve cash flow
6. Learn how to forecast cash flow
CONTENTS:
1. Introduction to cash flow
2. Causes of cash flow problems
3. Strategies to improve cash flow
4. Improving cash flow through waste elimination
5. Cash flow forecasting
To download this complete presentation, please visit: http://www.oeconsulting.com.sg
FFA- Statement of Schedule of Changes in Working Capitaluma reur
Statement Of Schedule Of Changes In Working Capital
This statement is prepared with the help of current assets and current liabilities relating to two different periods.
An increase or decrease in respect of each of such items should be recorded to ascertain the net increase or decrease in the working capital.
An increase in the value of current assets between two different periods indicates an increase in the working capital. It is an application of funds.
An increase in the value of current liabilities between two different periods indicates decrease in the working capital. It is sources of funds.
Cash flow is the flow of money in and out of the business. Managing your cash flow is vital for business survival and growth, even if you have existing cost savings programs in your organization.
The impact of disasters such as COVID-19 has driven the global economy into a recession and many businesses are only just trying to survive. Before taking drastic actions such as cutting salaries and staff, you might want to review your current cash flow performance to stem unnecessary cash outflow and eliminate waste in your processes.
To run your business effectively, you need to balance the timing and amount of your expenses with those of your income. This training presentation explains the various areas you need to consider when managing and improving cash flow in your business.
LEARNING OBJECTIVES:
1. Explain what cash flow means
2. Understand the cash flow cycle and importance of cash flow to a business
3. Identify major causes of cash flow problems
4. Define strategies to improve cash flow
5. Gain knowledge on eliminating waste to improve cash flow
6. Learn how to forecast cash flow
CONTENTS:
1. Introduction to cash flow
2. Causes of cash flow problems
3. Strategies to improve cash flow
4. Improving cash flow through waste elimination
5. Cash flow forecasting
To download this complete presentation, please visit: http://www.oeconsulting.com.sg
Cash FlowsIntroductionThe Statement of Cash Flows is the third.docxcravennichole326
Cash Flows
Introduction
The Statement of Cash Flows is the third basic financial statement that is presented with the Balance Sheet and the Income Statement on a periodic basis. By reviewing the changes in cash due to operations, investing activities, and financing activities, the analyst can better ascertain how cash was generated and spent.
The Statement of Cash Flows
The statement of cash flows was developed in the 1970s and 1980s as a reaction to the need for management to reconcile net income to available cash. Many managers questioned how a company could report a profit, but have no money, or report a loss and still have cash available; the statement of cash flows was developed to explain how the income statement related to the available cash. The statement of cash flows can help managers and business owners to understand the sources and uses of cash, and predict future cash requirements so that needs may be met.
The cash flow statement focuses attention on a firm's ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing (Libby, Libby, & Short, 2004). It is designed to help both managers and analysts answer important cash-related questions such as these:
Will the company have enough cash to pay its short-term debts to suppliers and other creditors without additional borrowing?
Is the company adequately managing its accounts receivable and inventory?
Has the company made necessary investments in new productive capacity?
Did the company generate enough cash flow internally to finance necessary investment, or did it rely on external financing?
Is the company changing the makeup of its external financing?
These questions and others can be answered through the preparation and examination of the statement of cash flows.
Operating, Investing, and Financing Activities
The statement of cash flows has three main sections: (a) cash flows from operating activities, which are related to earning income from normal, recurring operations; (b) cash flows from investing activities, which are related to the acquisition and sale of productive assets; and (c) cash flows from financing activities, which are related to external financing of the enterprise. The net cash inflow or outflow for the year is the same amount as the increase or decrease in cash and cash equivalents for the year on the balance sheet. Cash equivalents are highly liquid investments with original maturities of less than three months. The operating activities section of the statement of cash flows can be prepared using either the direct or indirect method; the investing and financing activities sections are always prepared directly.
Direct Method of Determining Cash Flows from Operating Activities
The direct method for reporting cash flows from operating activities separates all of the operating transactions that result in either a deb ...
How do you cross check the statement of cash flowsSolutionWe .pdfAMITJWELLER123
How do you cross check the statement of cash flows?
Solution
We can cross check statement of Cash flows in following ways :-
1) Cross check from Profit and loss statement
On the cash flow statement, operating activities derive from the operations of the business itself.
They can be presented either through the direct or indirect method. The direct method explicitly
states the amounts received from customers and paid to suppliers and employees. The indirect
method, which is more common, begins with net income and adjusts for any non-cash
transactions and any changes in accounts receivable or other balance sheet items related to the
operations. Both methods will have the same end result and both methods are acceptable.
2) Checking Investing activities from balance sheet
Investing activities concern investments in property and equipment for the business, as well as
financial investments. In the cash flow statement, investing activities include both outlays for
purchases and cash receipts for disposals of investments.
We can cross check all the investing activties from balance sheet as well as from bank.
3) Cross check Financing activities from balance sheet as well as from bank
Financing activities are the activities related to financing the business with both debt (loans,
which are shown as liabilities) and equity (capital stock and other equity instruments). Common
examples of items in this category include loan principal received, repayments and dividends
paid.
So, we need to cross check all the activites from bank and cash account.
The rules for cash flow adjustments to net income are:
1) Changes in equity affect Financing activites
An asset increase during the period decreases cash flow from profit
A liability decrease during the period decreases cash flow from profit
An asset decrease during the period increases cash flow from profit
A liability increase during the period increases cash flow from profit.
ACC 371 Lecture 7Statement of Cash FlowsIntroductionGenerall.docxaryan532920
ACC 371 Lecture 7
Statement of Cash Flows
Introduction
Generally Accepted Accounting Principles (GAAP) typically evolves in practice, rather than being written and then followed. An example of this evolution is the financial statement called, the statement of cash flows. Managers and business owners often asked why their companies were profitable but did not have available cash, or had plenty of cash but were operating at a loss. In response to this need, accountants developed the statement of cash flows to explain how cash was provided to the company or used by the company. The statement of cash flows is now a required financial statement according to GAAP. Since the statement of cash flows was developed long after the other three statements—the balance sheet, income statement, and statement of stockholders' equity—it does not follow the same flow as the other statements and requires information from all of the other statements, as well as additional information, in order to be compiled. Today, the statement of cash flows is one of the most significant financial statements for the potential investor or creditor.
Usefulness of the Statement of Cash Flows
The statement of cash flows is useful because it shows an organization's ability to produce future cash flows, provides an indication that the organization can meet its obligations, reports the differences between net income and net cash flows, and identifies the cash and noncash investing and financing activities during the period.
Profitable operations do not always ensure positive cash flow. While net income is important, cash flow is also critical to a company's success. Cash flow permits a company to expand operations, replace worn assets, take advantage of new investment opportunities, and pay dividends to its owners. Both managers and analysts need to understand the various sources and uses of cash that are associated with business activities.
The cash flow statement focuses attention on a firm's ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing (Libby, Libby, & Short, 2004). It is designed to help both managers and analysts answer important cash-related questions such as these:
Will the company have enough cash to pay its short-term debts to suppliers and other creditors without additional borrowing?
Is the company adequately managing its accounts receivable and inventory?
Has the company made necessary investments in new productive capacity?
Did the company generate enough cash flow internally to finance necessary investment or did it rely on external financing?
Is the company changing the makeup of its external financing?
These questions and others can be answered through the preparation and examination of the statement of cash flows.
Operating, Investing, and Financing Activities
The statement has three main sections: (a) cash flows from operating activities, which are relate.
2. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
2
Chapter 3 – Outline (1)
• Introduction – The cash flow statement
• Usefulness of cash flow information
• Cash flow cycles
• Format and structure of the cash flow statement
• Cash flow from operating activities
• Cash flows from investing and financing activities
• Direct and indirect method for operating cash flows
• Constructing a cash flow statement
• Disposal of fixed assets
• Presentational differences
3. • A cash flow statement presents information about
the cash flows associated with the company’s main
operations and those associated with its investing
and financing activities of the period.
• A cash flow statement functions in conjunction with
both the income statement (performance dimension)
and the balance sheet (financial position)
• IAS 7 Cash Flow Statements
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
3
Cash Flow Statement
4. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
4
Usefulness of cash flow information
• Ability to generate adequate cash flows is a
significant performance dimension
• Cash flow information clarifies the dynamics of
short-term liquidity and long-term solvency
• Cash flow information is an essential input for
economic decision models
5. Cash flow versus profit
• Cash flow and profit are different economic phenomena
But linked through the mechanisms of accrual
accounting!
• Cash flows are factual details of incoming and outgoing
flows of cash, while the balance sheet and income statement
emanate from professional judgement and are not a direct
projection of objective economic data
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
5
6. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
6
Liquidity/solvency and cash flows
• Liquidity
- Relates to “nearness to cash” of the structure of assets
- Determined by capacity to convert current assets into cash
• Solvency
- Relates to future availability of cash in order to settle financial
liabilities on due date
- Determined by timing and uncertainty of expected future cash
payments and cash receipts
• Liquidity and solvency ratios are determined on
static financial position data, while cash flows
reflect changes in financial position
7. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
7
Relationship with BS and IS
• Spontaneous Financing
Firm will also always have minimum level of Accounts
Payable—in effect, money you have borrowed
• Accounts Payable (and Accruals) are generated spontaneously
• Arise automatically with inventory and expenses
• Offset the funding required to support current assets
Income statement
BS at start Cash flow BS at end
A cash flow statement reflects both “profit related” and “non-
profit related” activities (investing and financing) with an impact
on available cash over the period covered in the income statement
8. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
8
Related questions????
1. From which sources did the company raise cash last year? How was
this cash used?
2. Were the normal operating activities capable of satisfying its need
for cash during the year?
3. If not, is the shortage of cash compensated by new borrowings,
issuing new share capital or by selling fixed assets?
4. Is a surplus of cash used for repayment of debt, for investments or
for distribution of dividends?
5. Why has the balance of cash available decreased, knowing that the
company’s operations have been profitable?
9. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
9
Cash conversion cycles
• Cash flows through the company continuously in a
series of short-term and long-term conversion cycles
• The ST - cash conversion cycle (operating cycle)
relates to the main business
operations
= OPERATING ACTIVITIES
10. Cash conversion cycles Continues 2
• The LT- cash conversion cycles relate to the
acquisition, renewal and disposal of intangible and
tangible infrastructure and the long-term sourcing of
funds
Productive capacity acquired for cash and subsequently
consumed during several ST-operating cycles
Acquisition and disposal of infrastructure =
INVESTING ACTIVITIES
External sourcing of funds = FINANCING ACTIVITIES
• .
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
10
12. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
12
•
Fig. 3.1 Long-term and short-term cash
flow cycles
•Inventory
•Work in Progress •Sales
•Receipts•Payments
•Procurement
•Current payables •Inventory •Current receivables
•Cash and cash
equivalents
•Main operations
•External financing
•Investing/ Productive
infrastructure
13. • Cash flows from operating activities
• + Cash flows from investing activities
• + Cash flows from financing activities
• Net change in cash during period
• + Beginning cash balance
• Ending cash balance
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
13
Format and structure of the cash flow
statement
14. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
14
Format and structure of the cash flow
statement
15. Cash flows from operating activities
• Operating activities are primarily
the revenue-generating activities
of a company
• “Operating cash flow” is conceptually most near to “net profit”
• Main differences:
1. Non-cash expenses and non-cash revenues (f.i. depreciation
expense)
2. Non-operating items (f.i. gain on disposal of tangible fixed assets)
3. Timing differences between net profit and underlying cash flow (f.i.
changes in the level of inventories, receivables, creditors, etc.)
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
15
16. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
16
Operating cash flows: Examples
• Receipts from sale of goods and rendering of services (cashing in of receivables
included)
• Receipts from taxes on sales and VAT
• Receipts from royalties, fees, commissions,…
• Payments to suppliers (payment of creditors included)
• Payments to employees
• Payments of taxes, VAT, fines, …
17. Operating cash flows –
Direct versus indirect method
2 methods for identifying and presenting the operating cash flow:
• Direct method: engenders the presentation of the most important
categories of gross operating cash inflows and cash outflows
• Indirect method: net operating cash flow is determined by adjusting
the (net) profit figure for the 3 types of differences
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
17
18. Direct method - Example
•
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
18
Cash receipts from customers 30,150
Cash paid to suppliers and employees (27,600)
Cash generated from main operations 2,550
Income taxes paid (1170)
Net cash flow from operating activities 1,380
19. Indirect method - Example
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
19
Net profit before tax 3,350
Adjustments for:
Depreciation 490
Investment income (100)
3,740
Working capital changes:
Increase in trade and other receivables (500)
Decrease in inventories 1,050
Decrease in trade payables (1,740)
Cash generated from main operations 2,550
Income taxes paid
Net cash flow from operating activities
(1170)
1,380
20. Cash flows from investing activities
• Investing activities relate to the acquisition and disposal of long-term
tangible and intangible assets and other investments
• Cash flows from investing activities are an indication of the expansion
or downsizing of operating capacity
• Examples:
Payments for newly acquired equipment
Receipts from the disposal of a building
Payments for new
investments
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
20
21. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
21
Cash flows from financing activities
• Financing activities relate to changes in the size and composition of
contributed capital and financial debt of the company
• Examples:
Receipts from issuing new shares or bonds
Receipts from new bank loan
Payments for buy-back of shares
Repayments of loans
Payments of interest and
dividend
22. 1. Determine the net change in cash
Compare beginning and ending balance
2. Identify all transactions of the period leading to a change in cash
Direct: analyze movements in the accounts of cash
(equivalents) transaction by transaction
Indirect: explain net change of cash by analyzing all other
accounts, knowing that each transaction with an impact on
cash also affects a non-cash account
3. Use the information (of step 1 and 2) to construct a cash flow
statement according to the formal rules
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
22
Constructing a cash flow statement
23. Applying step 2
• Information for operating cash flow is primarily derived
from balances in the IS, while information for the two other
principal categories comes from the Balance Sheet (and
details in the Notes)
• Movements in the accounts indicate a change in financial
position and further examination is needed to determine if
they had a cash impact
• Check if balances have been impacted by “accrual-based
adjustments” or other “non-cash activities”
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
23
24. Fig. Classifying balance sheet movements
as inflows or outflows of cash
•
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
24
Assets Equity/
Liability
Increase Out flow Inflow
Decrease Inflow Out flow
25. Matching approach to asset financing
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
25
•Fixed Assets
•Permanent Current Assets
•Total Assets
•Fluctuating Current Assets
•Time
•$
•Short-term
•Debt
•Long-term
•Debt +
•Equity
•Capital
26. Conservative approach to asset financing
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
26
•Fixed Assets
•Permanent Current Assets
•Total Assets
•Fluctuating Current Assets
•Time
•$
•Short-term
•Debt
•Long-term
•Debt +
•Equity
• capital
27. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
27
•Fixed Assets
•Permanent Current Assets
•Total Assets
•Fluctuating Current Assets
•Time
•$
•Short-term
•Debt
•Long-term
•Debt +
•Equity
• capital
Aggressive approach to asset financing
28. FACTORS DETERMINING WORKING CAPITAL
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
28
1. Nature of the Industry
2. Demand of Industry
3. Cash requirements
4. Nature of the Business
5. Manufacturing time
6. Volume of Sales
7. Terms of Purchase and Sales
8. Inventory Turnover
9. Business Turnover
10. Business Cycle
11. Current Assets requirements
12. Production Cycle
•13. Credit control
14. Inflation or Price level changes
15. Profit planning and control
16. Repayment ability
17. Cash reserves
18. Operation efficiency
19. Change in Technology
20. Firm’s finance and dividend policy
21. Attitude towards Risk
29. EXCESS OR INADEQUATE WORKING CAPITAL
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
29
Every business concern should have adequate working capital to run
its business operations. It should have neither redundant or excess
working capital nor inadequate or shortage of working capital.
Both excess as well as shortage of working capital situations are bad
for any business. However, out of the two, inadequacy or shortage of
working capital is more dangerous from the point of view of the
firm.
30. Disadvantages of Redundant or Excess
Working Capital
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
30
Idle funds, non-profitable for business, poor ROI
Unnecessary purchasing & accumulation of inventories
over required level
Excessive debtors and defective credit policy, higher
incidence of B/D.
Overall inefficiency in the organization.
When there is excessive working capital, Credit worthiness
suffers
Due to low rate of return on investments, the market value
of shares may fall
31. Disadvantages of Inadequate Working
Capital
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
31
Can’t pay off its short-term liabilities in time.
Economies of scale are not possible.
Difficult for the firm to exploit favourable market situations
Day-to-day liquidity worsens
Improper utilization the fixed assets and ROA/ROI falls sharply
32. Management Of Working Capital ( WCM )
Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
32
Management of working capital is concerned with the problems
that arise in attempting to manage the current assets, the current
liabilities and the inter-relationship that exists between them. In
other words, it refers to all aspects of administration of CA and
CL.
Working Capital Management Policies of a firm have a great
effect on its profitability, liquidity and structural health of the
organization.
33. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
33
3D Nature of Working Capital Management
•Dimension I
•Profitability,
•Risk, & Liquidity
34. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
34
Principles Of Working Capital
Management
•PRINCIPLES OF
WORKING CAPITAL
MANAGEMENT
•Principle
of Risk
Variation
•Principle
of Cost of
Capital
•Principle
of Equity
Position
•Principle of
Maturity of
Payment
35. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
35
Maturity Matching Principle
• Maturity (due date) of financing should roughly
match duration (life) of asset being financed
Then financing /asset combination becomes self-
liquidating
• Cash inflows from asset can be used to pay off loan
36. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
36
Financing Net Working Capital
• According to maturity matching principle
Temporary (seasonal) should be financed with short-
term borrowing
Permanent working capital should be financed with
long-term sources, such as long-term debt and/or equity
• In practice, firms may use more or less short-term
funds to finance working capital
37. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
37
Figure 3.7(a):
Working Capital Financing Policies
38. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
38
Figure 3.7(b):
Working Capital Financing Policies
39. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
39
Short-Term vs. Long-Term Financing
• The mix of short- or long-term working capital
financing is a matter of policy
Use of long-term funds is a conservative policy
Use of short-term funds is an aggressive policy
40. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
40
Short-Term vs. Long-Term Financing
• Short-term financing
Cheap but risky
• Cheap—short-term rates generally lower than long-term rates
• Risky—because you are continually entering marketplace to
borrow
• Borrower will face changing conditions (ex; higher interest rates and
tight money)
41. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
41
Short-Term vs. Long-Term Financing
• Long-term financing
Safe but expensive
• Safe—you can secure the required capital
• Expensive—long-term rates generally higher than short-term
rates
42. Khursheed Ahmad Bhat, HOD. Department of Hospital Administration TMU
42
Working Capital Policy
• Firm must set policy on following issues:
How much working capital is used
Extent to which working capital is supported by short-
vs. long-term financing
How each component of working capital is managed
The nature/source of any short-term financing used