The document discusses cash flow analysis and the cash flow statement. It explains that the cash flow statement provides important information about a company's cash receipts and payments during an accounting period that is not available in the income statement. It describes the three sections of the cash flow statement - operating, investing, and financing activities - and what types of cash flows are included in each section. It also discusses how to prepare the cash flow statement using both the direct and indirect methods and the importance of understanding the linkages between the cash flow statement, income statement, and balance sheet.
This document provides an overview of cash flow statements. It begins by explaining what a cash flow statement is and its objectives. A cash flow statement assesses a firm's ability to generate and use cash over a period of time. It shows sources of cash from operations, investments, and financing, as well as uses of cash. The document then discusses the direct and indirect methods for preparing a cash flow statement according to Accounting Standard 3. It also provides examples of cash inflows and outflows from operating, investing, and financing activities.
This document discusses key aspects of financial statement and cash flow analysis. It covers the main financial statements including the balance sheet, income statement, statement of retained earnings, and statement of cash flows. It also discusses cash flow analysis, different types of ratios used to analyze financial performance (liquidity, activity, debt, profitability, market), and how to benchmark performance over time and against industry peers. The overall purpose is to analyze a company's financial position and performance through its financial statements and key metrics.
Cash flow statement shows the inflows and outflows of cash and cash equivalents over a period of time. It has three sections - operating, investing, and financing activities. The direct method shows the conversion of income statement items to cash flows directly, while the indirect method adjusts net income for non-cash items like depreciation. While it identifies cash generated from operations, cash flow statement is not equivalent to an income statement since dividend payments do not reflect liquidity and it excludes non-cash transactions. Fund flow statement analyzes changes in working capital and the sources and uses of funds, but lacks originality as it rearranges existing accounting data and only indicates past positions.
The document discusses the importance of the cash flow statement in addition to the balance sheet and profit and loss account. It states that the cash flow statement reflects the major sources of cash receipts and payments of a company and is helpful for investors, analysts, and others in assessing a company's ability to generate cash flows, meet obligations, and pay dividends. The cash flow statement classifies cash flows into operating, investing, and financing activities.
The document provides guidance on how to prepare a cash flow statement. It explains that a cash flow statement shows the inflow and outflow of cash from operating, investing, and financing activities. It discusses identifying cash sources and uses, classifying transactions, and preparing the statement using direct and indirect methods. The key is to distinguish between cash and accrual-based transactions and analyze changes in balance sheet accounts to determine the impact on cash flow.
The cash flow statement provides information about cash inflows and outflows during an accounting period. It is developed from balance sheet and income statement data and is an important analytical tool. The cash flow statement focuses on operating, investing, and financing activities. Operating activities relate to core business operations like sales and expenses. Investing activities involve the purchase and sale of long-term assets. Financing activities include borrowing, repaying debt, and providing returns to owners. Cash flow analysis is used both internally and externally to evaluate a firm's liquidity, investment decisions, ability to meet obligations, and future financing needs.
Material for PGPSE participants of AFTERSCHOOOL CENTRE FOR SOCIAL ENTREPRENEURSHIP. PGPSE is an entrepreneurship oriented programme, open for all, free for all.
This document provides an overview of cash flow statements. It begins by explaining what a cash flow statement is and its objectives. A cash flow statement assesses a firm's ability to generate and use cash over a period of time. It shows sources of cash from operations, investments, and financing, as well as uses of cash. The document then discusses the direct and indirect methods for preparing a cash flow statement according to Accounting Standard 3. It also provides examples of cash inflows and outflows from operating, investing, and financing activities.
This document discusses key aspects of financial statement and cash flow analysis. It covers the main financial statements including the balance sheet, income statement, statement of retained earnings, and statement of cash flows. It also discusses cash flow analysis, different types of ratios used to analyze financial performance (liquidity, activity, debt, profitability, market), and how to benchmark performance over time and against industry peers. The overall purpose is to analyze a company's financial position and performance through its financial statements and key metrics.
Cash flow statement shows the inflows and outflows of cash and cash equivalents over a period of time. It has three sections - operating, investing, and financing activities. The direct method shows the conversion of income statement items to cash flows directly, while the indirect method adjusts net income for non-cash items like depreciation. While it identifies cash generated from operations, cash flow statement is not equivalent to an income statement since dividend payments do not reflect liquidity and it excludes non-cash transactions. Fund flow statement analyzes changes in working capital and the sources and uses of funds, but lacks originality as it rearranges existing accounting data and only indicates past positions.
The document discusses the importance of the cash flow statement in addition to the balance sheet and profit and loss account. It states that the cash flow statement reflects the major sources of cash receipts and payments of a company and is helpful for investors, analysts, and others in assessing a company's ability to generate cash flows, meet obligations, and pay dividends. The cash flow statement classifies cash flows into operating, investing, and financing activities.
The document provides guidance on how to prepare a cash flow statement. It explains that a cash flow statement shows the inflow and outflow of cash from operating, investing, and financing activities. It discusses identifying cash sources and uses, classifying transactions, and preparing the statement using direct and indirect methods. The key is to distinguish between cash and accrual-based transactions and analyze changes in balance sheet accounts to determine the impact on cash flow.
The cash flow statement provides information about cash inflows and outflows during an accounting period. It is developed from balance sheet and income statement data and is an important analytical tool. The cash flow statement focuses on operating, investing, and financing activities. Operating activities relate to core business operations like sales and expenses. Investing activities involve the purchase and sale of long-term assets. Financing activities include borrowing, repaying debt, and providing returns to owners. Cash flow analysis is used both internally and externally to evaluate a firm's liquidity, investment decisions, ability to meet obligations, and future financing needs.
Material for PGPSE participants of AFTERSCHOOOL CENTRE FOR SOCIAL ENTREPRENEURSHIP. PGPSE is an entrepreneurship oriented programme, open for all, free for all.
The document discusses the purpose and components of a statement of cash flows. It explains that the statement of cash flows provides information about a company's cash inflows and outflows during a period and summarizes operating, investing and financing activities. It is comprised of three sections - operations, investing activities, and financing activities. The statement of cash flows helps users assess a company's liquidity, financial flexibility, operating capabilities, and risk.
The document discusses analysis of cash flow statements. It defines cash flow statements and explains that they classify transactions into operating, investing and financing activities. Operating activities include cash from sales and payments for supplies. Investing activities involve purchases and sales of long-term assets. Financing activities comprise items like share issuances and debt repayments. The document also outlines the preparation of cash flow statements, uses of the statements, and limitations like ignoring non-cash transactions.
The document discusses cash flow statements, which show the movement of cash between periods. It has three main sections:
1. It explains what cash flow statements are, their purpose of showing cash inflows and outflows from operating, investing and financing activities, and their advantages like ascertaining liquidity.
2. It covers the classification of cash flows into operating, investing and financing activities and provides examples of cash flows for each category.
3. It describes the direct and indirect methods for showing cash flows from operating activities, noting non-cash items and other classifications are excluded under the direct method.
This document provides information on management accounting and cash flow statements. It defines management accounting as the presentation and analysis of business information for internal management decision making. It then defines a cash flow statement as a financial statement showing the changes in cash and cash equivalents resulting from operating, investing, and financing activities. The objectives of the cash flow statement are to present the inflows and outflows of cash over a period and to help evaluate a company's liquidity, dividend-paying capacity, and reasons for changes in cash balances. Advantages include assessing liquidity and profitability, determining optimal cash balances, and aiding capital budgeting decisions.
The document provides guidance on preparing a cash flow statement. It discusses the components of a cash flow statement including operating, investing, and financing activities. It also explains how to construct a cash flow statement using both the direct and indirect methods and analyzes the information in a cash flow statement. Resources for further information are also included.
Preparation of cash flow statement as per indianVikas Kumar
The document discusses the preparation of a cash flow statement according to Indian accounting standards. It defines a cash flow statement as a statement that shows the flow of cash and cash equivalents during a period. The cash flow statement categorizes cash flows into three sections - operating, investing, and financing activities. Operating activities involve principal revenue activities and other non-investing/financing activities. Investing activities include long-term asset acquisitions and disposals. Financing activities cause changes in owner's equity and borrowings. The document provides the format for a cash flow statement.
The cash flow statement summarizes the inflows and outflows of cash and cash equivalents over a period of time. It has three sections - operating, investing, and financing activities. The operating section deals with cash from core business operations. The investing section includes cash from the purchase and sale of long-term assets. The financing section includes cash from activities related to changes in a company's capital structure and borrowing arrangements.
Cash flow is the net amount of cash moving in and out of a business. Positive cash flow means liquid assets are increasing, allowing a company to pay debts, reinvest, pay shareholders, and handle future challenges. Negative cash flow means liquid assets are decreasing. Cash flow statements focus on direct cash transactions and assess the quality of a company's income by showing if it can remain solvent. Fund flow shows net cash inflows and outflows between financial assets over time, without considering returns, to understand excess cash available to invest. Both cash flow and fund flow statements are important tools for short and long-term financial analysis and planning.
The document discusses the meaning, objectives, and limitations of cash flow statements and fund flow statements. It provides examples of how to calculate fund from operations, which is a key source of funds in the fund flow statement. Fund from operations is calculated by making adjustments to net profit for non-cash and non-operating items, such as depreciation, amortization, losses or gains on asset sales, dividends, and taxes. The document also discusses the importance and uses of the fund flow statement for financial analysis and planning.
This document discusses various types of free cash flow metrics used to evaluate a company's financial performance and flexibility. It defines free cash flow, free cash flow per share, free cash flow to equity, free cash flow yield, free cash flow to sales, and unlevered free cash flow. Formulas are provided for calculating each metric.
This document defines key terms related to cash flow analysis and cash flow statements. It explains that a cash flow statement indicates sources of cash inflows and outflows during an accounting period. It also outlines the direct and indirect methods for preparing a cash flow statement, including showing examples of the sections and calculations involved in each method.
The Basics of FINANCIAL STATEMENTS for Agricultural ProducersKUNWAR THAKUR
This Presentation is for farmers, ranchers, bookkeepers and business owners who want to use financial statements in their work but have little or no formal training in accounting or financial reporting,it leads the reader through financial statement development and shows how statements interact with each other to present a true financial picture of the business.
A cash flow statement presents information about the inflows and outflows of cash from a company's operating, investing, and financing activities over a period of time. It shows cash generated and used by the main business operations, investments in long-term assets or financial securities, and cash received or paid related to financing activities like issuing stock or taking loans. The statement is structured to first show cash flows from operating activities, then investing activities, and finally financing activities, with net changes in cash over the period.
The document discusses the statement of cash flows, including its meaning, classification, and advantages. A cash flow statement shows the inflows and outflows of cash from operating, investing, and financing activities over a period of time. Operating activities include cash from sales and payments for expenses. Investing activities involve the purchase and sale of long-term assets. Financing activities include equity contributions and repayment of debt. The cash flow statement is useful for planning, control, and short-term financial decision making by providing insight into a company's liquidity and cash generation.
Cash flow statement vs fund flow statementshaivlini
A cash flow statement shows the changes in cash position of a company over a period of time by outlining cash inflows and outflows from operating, investing, and financing activities. It differs from a funds flow statement, which analyzes changes in working capital and is based on accrual accounting, while a cash flow statement strictly focuses on changes in a company's cash balance on a cash basis. Cash flow statements are more useful for assessing a company's short-term liquidity as they directly track cash inflows and outflows.
The document discusses key aspects of a statement of cash flows including its four main parts (cash, operating activities, investing activities, financing activities), methods for preparing it (direct vs indirect), uses both internally and externally, limitations, and provides an example cash flow statement for 5 companies. It explains how the statement of cash flows reconciles accrual-based accounting to cash-based transactions and flows.
The document discusses cash flow statements which depict changes in a company's cash position over time. It defines key terms like cash, cash equivalents, cash flows, operating activities, investing activities, and financing activities. It also outlines how to calculate cash flows from operating profits by adjusting for non-cash items and changes in current assets and liabilities. Cash flows from investing activities represent cash movement into and out of long-term assets, while financing activities reflect changes in owners' equity and borrowings.
The document summarizes key aspects of a cash flow statement, including that it shows how changes in balance sheet accounts and income affect cash and cash equivalents through operating, investing, and financing activities. It is divided into three parts - operating activities related to a company's core business, investing activities related to capital asset investments and gains/losses, and financing activities related to raising and repaying capital. The cash flow statement is useful for accounting personnel, lenders, investors, employees, and shareholders of a business.
Cash flow analysis involves analyzing a company's cash flow statement, which is divided into three parts - operating, investing, and financing cash flows. When analyzing cash flow, key items to examine include repayment of loans, increases in working capital due to business expansion, capital expenditure requirements, other commitments, and contingent liabilities as insufficient cash flow is a major reason why companies go bankrupt.
Cash Flow Statement is a basic concept which every young manager must learn. This presentation excellently explains what you should know about this topic!
The document discusses cash flow statements, including:
1. Cash flow statements describe changes in cash between periods by showing cash inflows and outflows from operating, investing, and financing activities.
2. The purpose is to provide information about a company's gross receipts and payments over a period of time to assess liquidity and profitability.
3. Advantages include ascertaining liquidity, determining optimal cash balances, cash management, and performance evaluation.
The document discusses the purpose and components of a statement of cash flows. It explains that the statement of cash flows provides information about a company's cash inflows and outflows during a period and summarizes operating, investing and financing activities. It is comprised of three sections - operations, investing activities, and financing activities. The statement of cash flows helps users assess a company's liquidity, financial flexibility, operating capabilities, and risk.
The document discusses analysis of cash flow statements. It defines cash flow statements and explains that they classify transactions into operating, investing and financing activities. Operating activities include cash from sales and payments for supplies. Investing activities involve purchases and sales of long-term assets. Financing activities comprise items like share issuances and debt repayments. The document also outlines the preparation of cash flow statements, uses of the statements, and limitations like ignoring non-cash transactions.
The document discusses cash flow statements, which show the movement of cash between periods. It has three main sections:
1. It explains what cash flow statements are, their purpose of showing cash inflows and outflows from operating, investing and financing activities, and their advantages like ascertaining liquidity.
2. It covers the classification of cash flows into operating, investing and financing activities and provides examples of cash flows for each category.
3. It describes the direct and indirect methods for showing cash flows from operating activities, noting non-cash items and other classifications are excluded under the direct method.
This document provides information on management accounting and cash flow statements. It defines management accounting as the presentation and analysis of business information for internal management decision making. It then defines a cash flow statement as a financial statement showing the changes in cash and cash equivalents resulting from operating, investing, and financing activities. The objectives of the cash flow statement are to present the inflows and outflows of cash over a period and to help evaluate a company's liquidity, dividend-paying capacity, and reasons for changes in cash balances. Advantages include assessing liquidity and profitability, determining optimal cash balances, and aiding capital budgeting decisions.
The document provides guidance on preparing a cash flow statement. It discusses the components of a cash flow statement including operating, investing, and financing activities. It also explains how to construct a cash flow statement using both the direct and indirect methods and analyzes the information in a cash flow statement. Resources for further information are also included.
Preparation of cash flow statement as per indianVikas Kumar
The document discusses the preparation of a cash flow statement according to Indian accounting standards. It defines a cash flow statement as a statement that shows the flow of cash and cash equivalents during a period. The cash flow statement categorizes cash flows into three sections - operating, investing, and financing activities. Operating activities involve principal revenue activities and other non-investing/financing activities. Investing activities include long-term asset acquisitions and disposals. Financing activities cause changes in owner's equity and borrowings. The document provides the format for a cash flow statement.
The cash flow statement summarizes the inflows and outflows of cash and cash equivalents over a period of time. It has three sections - operating, investing, and financing activities. The operating section deals with cash from core business operations. The investing section includes cash from the purchase and sale of long-term assets. The financing section includes cash from activities related to changes in a company's capital structure and borrowing arrangements.
Cash flow is the net amount of cash moving in and out of a business. Positive cash flow means liquid assets are increasing, allowing a company to pay debts, reinvest, pay shareholders, and handle future challenges. Negative cash flow means liquid assets are decreasing. Cash flow statements focus on direct cash transactions and assess the quality of a company's income by showing if it can remain solvent. Fund flow shows net cash inflows and outflows between financial assets over time, without considering returns, to understand excess cash available to invest. Both cash flow and fund flow statements are important tools for short and long-term financial analysis and planning.
The document discusses the meaning, objectives, and limitations of cash flow statements and fund flow statements. It provides examples of how to calculate fund from operations, which is a key source of funds in the fund flow statement. Fund from operations is calculated by making adjustments to net profit for non-cash and non-operating items, such as depreciation, amortization, losses or gains on asset sales, dividends, and taxes. The document also discusses the importance and uses of the fund flow statement for financial analysis and planning.
This document discusses various types of free cash flow metrics used to evaluate a company's financial performance and flexibility. It defines free cash flow, free cash flow per share, free cash flow to equity, free cash flow yield, free cash flow to sales, and unlevered free cash flow. Formulas are provided for calculating each metric.
This document defines key terms related to cash flow analysis and cash flow statements. It explains that a cash flow statement indicates sources of cash inflows and outflows during an accounting period. It also outlines the direct and indirect methods for preparing a cash flow statement, including showing examples of the sections and calculations involved in each method.
The Basics of FINANCIAL STATEMENTS for Agricultural ProducersKUNWAR THAKUR
This Presentation is for farmers, ranchers, bookkeepers and business owners who want to use financial statements in their work but have little or no formal training in accounting or financial reporting,it leads the reader through financial statement development and shows how statements interact with each other to present a true financial picture of the business.
A cash flow statement presents information about the inflows and outflows of cash from a company's operating, investing, and financing activities over a period of time. It shows cash generated and used by the main business operations, investments in long-term assets or financial securities, and cash received or paid related to financing activities like issuing stock or taking loans. The statement is structured to first show cash flows from operating activities, then investing activities, and finally financing activities, with net changes in cash over the period.
The document discusses the statement of cash flows, including its meaning, classification, and advantages. A cash flow statement shows the inflows and outflows of cash from operating, investing, and financing activities over a period of time. Operating activities include cash from sales and payments for expenses. Investing activities involve the purchase and sale of long-term assets. Financing activities include equity contributions and repayment of debt. The cash flow statement is useful for planning, control, and short-term financial decision making by providing insight into a company's liquidity and cash generation.
Cash flow statement vs fund flow statementshaivlini
A cash flow statement shows the changes in cash position of a company over a period of time by outlining cash inflows and outflows from operating, investing, and financing activities. It differs from a funds flow statement, which analyzes changes in working capital and is based on accrual accounting, while a cash flow statement strictly focuses on changes in a company's cash balance on a cash basis. Cash flow statements are more useful for assessing a company's short-term liquidity as they directly track cash inflows and outflows.
The document discusses key aspects of a statement of cash flows including its four main parts (cash, operating activities, investing activities, financing activities), methods for preparing it (direct vs indirect), uses both internally and externally, limitations, and provides an example cash flow statement for 5 companies. It explains how the statement of cash flows reconciles accrual-based accounting to cash-based transactions and flows.
The document discusses cash flow statements which depict changes in a company's cash position over time. It defines key terms like cash, cash equivalents, cash flows, operating activities, investing activities, and financing activities. It also outlines how to calculate cash flows from operating profits by adjusting for non-cash items and changes in current assets and liabilities. Cash flows from investing activities represent cash movement into and out of long-term assets, while financing activities reflect changes in owners' equity and borrowings.
The document summarizes key aspects of a cash flow statement, including that it shows how changes in balance sheet accounts and income affect cash and cash equivalents through operating, investing, and financing activities. It is divided into three parts - operating activities related to a company's core business, investing activities related to capital asset investments and gains/losses, and financing activities related to raising and repaying capital. The cash flow statement is useful for accounting personnel, lenders, investors, employees, and shareholders of a business.
Cash flow analysis involves analyzing a company's cash flow statement, which is divided into three parts - operating, investing, and financing cash flows. When analyzing cash flow, key items to examine include repayment of loans, increases in working capital due to business expansion, capital expenditure requirements, other commitments, and contingent liabilities as insufficient cash flow is a major reason why companies go bankrupt.
Cash Flow Statement is a basic concept which every young manager must learn. This presentation excellently explains what you should know about this topic!
The document discusses cash flow statements, including:
1. Cash flow statements describe changes in cash between periods by showing cash inflows and outflows from operating, investing, and financing activities.
2. The purpose is to provide information about a company's gross receipts and payments over a period of time to assess liquidity and profitability.
3. Advantages include ascertaining liquidity, determining optimal cash balances, cash management, and performance evaluation.
The document provides guidance on how to prepare a cash flow statement for a business. It explains that a cash flow statement traces the flow of funds into and out of a business during an accounting period and is important for financial management. It then outlines the key components of a cash flow statement, including operating, investing and financing activities. The document walks through how to construct a cash flow statement step-by-step using sample income statement and balance sheet data from a fictional company. It covers calculating cash flows directly from revenue and expense accounts or indirectly by reconciling net income.
This document discusses cash flow analysis and cash flow statements. It defines a cash flow statement as reporting cash inflows and outflows during a period, classified by operating, investing and financing activities. The objectives are to provide cash flow information, evaluate timing of cash flows, and classify cash flows. Advantages include assessing cash generation ability, classifying cash flows, and aiding forecasting. Limitations are that it only shows cash amounts and excludes non-cash items. The document also provides an example cash flow statement format and calculations.
This document discusses cash flow analysis and the statement of cash flows. It covers key topics such as the relevance of cash flows, how to construct a statement of cash flows using both the direct and indirect methods, special topics related to cash flows, implications of cash flow analysis, and how to analyze cash flows. The statement of cash flows provides important information about a company's liquidity, solvency, and financial flexibility that is not available from its income statement alone.
The document provides an overview of cash flow statements including their meaning, objectives, advantages, disadvantages and classification of cash flows. It explains that cash flow statements reveal movements in cash from operating, investing and financing activities. The objectives are to understand liquidity, impact of activities and cash earning capacity. Cash flows are classified as operating, investing or financing depending on the nature of transaction.
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 ...
Financial Statements and Business Model Canvas_Nov5th.pptxRashmi Gowda KM
The document provides information on financial statements and the business model canvas. It defines financial statements as documents that show a company's financial status at a specific point in time, including balance sheets, income statements, cash flow statements, and statements of retained earnings. It then explains the key elements of each financial statement. The document also defines the business model canvas as a strategic management template used to develop and document business models using nine building blocks: key partners, key activities, value propositions, customer relationships, customer segments, key resources, distribution channels, cost structure, and revenue streams. It provides an example canvas for Uber.
This document discusses the statement of cash flows and cash flow analysis. It begins by explaining the relevance of cash flows and the statement of cash flows. The statement of cash flows reports cash receipts and payments categorized by operating, investing, and financing activities. It can be constructed using either the direct or indirect method. The indirect method adjusts net income for non-cash items to determine cash flows from operations. Cash flow analysis helps assess a company's liquidity, solvency, and financial flexibility. Ratios like the cash flow adequacy ratio and cash reinvestment ratio can provide additional insights.
The document discusses major classifications of cash flows according to accounting standard AS-3 and the importance of disclosing non-cash transactions. It covers cash flows from operating, investing and financing activities, and how non-cash transactions that significantly impact a company's financial position should be disclosed, either in a separate schedule or note. Key financial statements including the balance sheet, income statement and cash flow statement are also explained, along with their objectives, components and limitations.
This document provides an overview of the statement of cash flows, including its purpose, key components, and methods of preparation. It discusses cash flows from operating, investing and financing activities and how they are classified. It also describes the indirect and direct methods for preparing the statement of cash flows and provides an example of each. Key terms like cash and cash equivalents, free cash flow, and non-cash transactions are also explained.
The document discusses the statement of cash flows, including its purpose and components. It explains that the statement of cash flows reports an entity's cash flows during a period and fulfills purposes like predicting future cash flows and evaluating management decisions. It describes the three sections of the statement of cash flows - operating, investing, and financing activities - and provides examples of cash inflows and outflows that would be included in each section. The document also covers the direct and indirect methods for preparing the statement of cash flows and includes examples of classwork problems preparing the statement of cash flows.
A presentation about the Cash Flow Statement ,whole chapter is covered in the slides .one can easily understand the concept of cash flow statement
and a video is also there but link went missing so please search it on youtube by the name of "cash flow statement in 3-min" a beautiful video to understand the basic concept of cash flow statement.In the end a numerical has solved for the better understanding ,which let u fetch marks in your examinations.
This document is a term assignment submitted by students for a managerial accounting course. It discusses cash flow from operations, including the basic meaning and objectives of cash flow statements. It describes the three types of cash flows - operating, investing and financing activities. For operating activities, it explains how cash flow is calculated using both the direct and indirect methods. It also discusses some reasons and methods for potential manipulation of cash flows, such as through dishonest reporting of accounts payable or including non-operating cash flows.
The cash flow statement describes sources and uses of cash over a period of time. It is based on cash accounting rather than accrual accounting. The statement summarizes changes in a business's cash position between two balance sheet dates by detailing cash inflows and outflows. Common sources include cash from operations, borrowing, and asset sales, while uses include cash lost in operations, loan repayments, asset purchases, and dividend payments. The statement is prepared in either report or T-account format.
The document discusses the importance and preparation of the statement of cash flows, which provides a summary of the amount of cash and cash equivalents entering and leaving a company during an accounting period. It explains that the statement of cash flows has three main sections - operating activities, investing activities, and financing activities - that show cash flows from core business operations, long-term asset and investment activities, and capital structure activities like share issuance and debt repayment. The document also outlines the key steps and sources of information used to prepare the statement of cash flows.
The cash flow statement shows a company's cash inflows and outflows over a period of time. It is separated into three sections - operating, investing, and financing activities. The operating section shows cash from core business operations, investing includes cash from capital expenditures and asset sales, and financing contains cash from issuing/paying debt and dividends. Analyzing the cash flow statement provides insight into a company's liquidity, solvency, and ability to fund operations and growth over time.
This document discusses high-level concepts related to cash flow statements. It begins with definitions of key terms like cash flows and cash equivalents. It then lists the objectives and limitations of cash flow statements. The major activities shown on a cash flow statement - operating, investing and financing activities - are introduced. Examples of components included in each section are provided. Finally, common questions and answers on cash flow statements are presented, covering topics like classification of transactions and the treatment of non-cash items.
Why cash flow statements are importantShweta Johri
The cash flow statement provides important information about a company's cash flows from operating, investing, and financing activities. It complements the income statement and balance sheet by showing how changes in balance sheet accounts affect cash flow. The cash flow from operations section indicates whether a company is generating enough cash internally and is a key metric to evaluate sustainability and quality of earnings. The cash flow statement also provides insights into how management is allocating cash flows across investing and financing activities. Key metrics like free cash flow derived from the cash flow statement help assess a company's liquidity and ability to operate over the long run.
The cash flow statement provides important information about a company's cash flows from operating, investing, and financing activities. It complements the income statement and balance sheet by showing how changes in balance sheet accounts affect cash flow. The cash flow from operations section indicates whether a company is generating enough cash internally and is a key metric to evaluate profitability and sustainability. The cash flow statement also provides insights into how a company obtains and spends cash overall.
Strategies for Effective Upskilling is a presentation by Chinwendu Peace in a Your Skill Boost Masterclass organisation by the Excellence Foundation for South Sudan on 08th and 09th June 2024 from 1 PM to 3 PM on each day.
Executive Directors Chat Leveraging AI for Diversity, Equity, and InclusionTechSoup
Let’s explore the intersection of technology and equity in the final session of our DEI series. Discover how AI tools, like ChatGPT, can be used to support and enhance your nonprofit's DEI initiatives. Participants will gain insights into practical AI applications and get tips for leveraging technology to advance their DEI goals.
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How to Build a Module in Odoo 17 Using the Scaffold MethodCeline George
Odoo provides an option for creating a module by using a single line command. By using this command the user can make a whole structure of a module. It is very easy for a beginner to make a module. There is no need to make each file manually. This slide will show how to create a module using the scaffold method.
This slide is special for master students (MIBS & MIFB) in UUM. Also useful for readers who are interested in the topic of contemporary Islamic banking.
A workshop hosted by the South African Journal of Science aimed at postgraduate students and early career researchers with little or no experience in writing and publishing journal articles.
How to Fix the Import Error in the Odoo 17Celine George
An import error occurs when a program fails to import a module or library, disrupting its execution. In languages like Python, this issue arises when the specified module cannot be found or accessed, hindering the program's functionality. Resolving import errors is crucial for maintaining smooth software operation and uninterrupted development processes.
it describes the bony anatomy including the femoral head , acetabulum, labrum . also discusses the capsule , ligaments . muscle that act on the hip joint and the range of motion are outlined. factors affecting hip joint stability and weight transmission through the joint are summarized.
How to Setup Warehouse & Location in Odoo 17 InventoryCeline George
In this slide, we'll explore how to set up warehouses and locations in Odoo 17 Inventory. This will help us manage our stock effectively, track inventory levels, and streamline warehouse operations.
বাংলাদেশের অর্থনৈতিক সমীক্ষা ২০২৪ [Bangladesh Economic Review 2024 Bangla.pdf] কম্পিউটার , ট্যাব ও স্মার্ট ফোন ভার্সন সহ সম্পূর্ণ বাংলা ই-বুক বা pdf বই " সুচিপত্র ...বুকমার্ক মেনু 🔖 ও হাইপার লিংক মেনু 📝👆 যুক্ত ..
আমাদের সবার জন্য খুব খুব গুরুত্বপূর্ণ একটি বই ..বিসিএস, ব্যাংক, ইউনিভার্সিটি ভর্তি ও যে কোন প্রতিযোগিতা মূলক পরীক্ষার জন্য এর খুব ইম্পরট্যান্ট একটি বিষয় ...তাছাড়া বাংলাদেশের সাম্প্রতিক যে কোন ডাটা বা তথ্য এই বইতে পাবেন ...
তাই একজন নাগরিক হিসাবে এই তথ্য গুলো আপনার জানা প্রয়োজন ...।
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LAND USE LAND COVER AND NDVI OF MIRZAPUR DISTRICT, UPRAHUL
This Dissertation explores the particular circumstances of Mirzapur, a region located in the
core of India. Mirzapur, with its varied terrains and abundant biodiversity, offers an optimal
environment for investigating the changes in vegetation cover dynamics. Our study utilizes
advanced technologies such as GIS (Geographic Information Systems) and Remote sensing to
analyze the transformations that have taken place over the course of a decade.
The complex relationship between human activities and the environment has been the focus
of extensive research and worry. As the global community grapples with swift urbanization,
population expansion, and economic progress, the effects on natural ecosystems are becoming
more evident. A crucial element of this impact is the alteration of vegetation cover, which plays a
significant role in maintaining the ecological equilibrium of our planet.Land serves as the foundation for all human activities and provides the necessary materials for
these activities. As the most crucial natural resource, its utilization by humans results in different
'Land uses,' which are determined by both human activities and the physical characteristics of the
land.
The utilization of land is impacted by human needs and environmental factors. In countries
like India, rapid population growth and the emphasis on extensive resource exploitation can lead
to significant land degradation, adversely affecting the region's land cover.
Therefore, human intervention has significantly influenced land use patterns over many
centuries, evolving its structure over time and space. In the present era, these changes have
accelerated due to factors such as agriculture and urbanization. Information regarding land use and
cover is essential for various planning and management tasks related to the Earth's surface,
providing crucial environmental data for scientific, resource management, policy purposes, and
diverse human activities.
Accurate understanding of land use and cover is imperative for the development planning
of any area. Consequently, a wide range of professionals, including earth system scientists, land
and water managers, and urban planners, are interested in obtaining data on land use and cover
changes, conversion trends, and other related patterns. The spatial dimensions of land use and
cover support policymakers and scientists in making well-informed decisions, as alterations in
these patterns indicate shifts in economic and social conditions. Monitoring such changes with the
help of Advanced technologies like Remote Sensing and Geographic Information Systems is
crucial for coordinated efforts across different administrative levels. Advanced technologies like
Remote Sensing and Geographic Information Systems
9
Changes in vegetation cover refer to variations in the distribution, composition, and overall
structure of plant communities across different temporal and spatial scales. These changes can
occur natural.
2. Learning Objectives
explain the meaning, usefulness and purpose of
cash flow statement
identify cash flow from three different activities
understand two different methods of preparing
cash flow statement
understand free cash flow
study various types of cash flow ratios
test solvency by calculating cash flow ratios
2
3. CASH FLOW ANALYSIS
•The income statement is based on the accrual method, and
net income may not represent cash generated from
operations.
•Net income, based on accrual accounting, is not the same
thing as cash earnings.
•When the timing of revenue or expense recognition differs
from the receipt or payment of cash, it is reflected in
changes in balance sheet accounts.
3
4. • A company may be generating positive and
growing net income but ………………….
• may be headed for insolvency because
insufficient cash is being generated from
operating activities.
• Therefore constructing a statement of cash flows is
very important in an analysis of a firm’s activities
and its prospects. 4
5. THE CASH FLOW STATEMENT
•The cash flow statement provides information
about…………….a company’s cash receipts and
cash payments during an accounting period.
•showing how these cash flows link the ending cash
balance to the beginning balance shown on the
company ’ s balance sheet.
5
6. • The cash flow statement reconciles the beginning
and ending balances of cash over an accounting
period.
• The change in cash is a result of the firm’s
operating, investing, and financing activities.
+ Operating Activities
+ Investing Activities
+ Financing Activities
= Change in cash balance
+ Beginning Cash Balance
- Ending Cash Balance.
6
7. The cash flow statement provides information beyond that
available from the income statement, which is based on
accrual, rather than cash accounting.
The cash flow statement provides the following.
—provide information on cash inflows, outflows for
a period.
—Information about a company’s cash receipts and
cash payments during an accounting period.
7
8. —Information about a company’s operating,
investing and financing activities.
—An understanding of the impact of accrual
accounting events on cash flows.
—provides information to assess the firm’s liquidity,
solvency, and financial flexibility.
8
9. An analyst can use the statement of cash flows to
determine whether;
Regular operation generate enough cash to sustain
the business
Enough cash is generated to pay off existing debts
as they mature.
The firm is likely to need additional financing
Unexpected obligations can be met.
The firm can take advantage of new business
opportunities as they arise.
9
10. A firm’s cash receipts and cash payments are
classified on the cash flow statement as
operating, investing, or financing activities.
Cash flow from operating activities
Cash flow from financing activities
Cash flow from investing activities
10
11. CASH FLOW FROM OPERATING
ACTIVITIES
•Sometimes it is referred to as “cash flow from
operations/operating cash flow.
•Operating activities include the company’s
day-to-day activities that create revenues,
such as selling inventory and providing
services.
11
12. • Cash inflows result from cash sales and from
collection of accounts receivable.
Examples……………………..
• cash receipts from the provision of services and
royalties, commissions, and other revenue.
• To generate revenue, companies undertake
activities such as manufacturing inventory,
purchasing inventory from suppliers, and paying
employees.
12
13. Cash outflows result from cash
payments……………………
•for inventory, salaries, taxes, and other operating-
related expenses and from paying accounts payable.
•Additionally, operating activities include cash
receipts and payments related to securities held for
dealing or trading purposes (as opposed to being held
for investment).
13
14. CASH FLOW FROM INVESTING ACTIVITES
•Investing activities include purchasing and selling
investments. …………….
•Investments include property, plant, and
equipment; other long-term assets; and
•both long-term and short-term investments in the
equity and debt (bonds and loans) issued by other
companies.
14
15. Cash inflows in the investing category include……….
•cash receipts from the sale of non-trading
securities; property, plant, and equipment; or
•other long-term assets.
Cash outflows include …………………………
•cash payments for the purchase of these assets.
15
16. CASH FLOW FROM FINANCING
ACTIVITIES
•Financing activities include obtaining or repaying
capital, such as equity and long-term debt.
•Cash inflows in this category include…………….
cash receipts from issuing stock (common or
preferred) or bonds and cash receipts from
borrowing.
16
17. Cash outflows include …………………
•cash payments to repurchase stock (e.g., treasury
stock),
•to pay dividends, and
•to repay bonds and other borrowings.
Note that indirect borrowing using accounts payable
is not considered a financing activity—such
borrowing would be classified as an operating
activity.
17
18. NON CASH INVESTING/FINANCING
ACTIVITIES
—These activities are not reported in the cash flow
statement since they do not result in flows or
outflows of cash.
—These are significant investing and financing
activities that do not directly affect cash.
—These activities involve only on long-term assets,
long-term liabilities and stock holder’s equity.
18
19. • These transactions must be disclosed in either
footnote or supplement schedule to the cash flow
statement.
• Analyst should incorporate these transactions into
analysis of past and current performance, and
include their effects in estimating future cash
flows.
EXAMPLE:
• Issuance of common stock to retire long-term debt
• Purchase of equipment with a note payable
• Issuance of stock to acquire land
19
20. MAJOR SOURCES AND USES OF CASH
•Cash flow analysis begins with an evaluation of the
firm’s sources and uses of cash from operating,
investing, and financing activities.
•Sources and uses of cash change as the firm moves
through its life cycle.
For example:
In the early stage of growth…………………
•Experience negative operating cash flow
20
21. • Negative operating cash flow usually financed
externally by issuing debt or equity securities
• Over the long term firm must be able to generate
operating cash flows that exceed capital
expenditure and provide a return to debt and
equity holders.
21
22. CASH FLOWS FROM INVESTING
ACTIVITIES
Cash flows are related to an entity’s life cycle stage
– Significant cash outflows in the emerging and growth stages
of business
– They become positive and peak during business maturity
– CFIs trend toward zero as a firm declines and ceases
operations
22
23. CASH FLOWS FROM FINANCING
ACTIVITIES
CFFs are related to an entity’s life cycle stage
– Significant cash inflows in the emerging and growth
stages of business
– They decline during business maturity
– CFFs negative as a firm declines and ceases
operations (return of investment)
23
24. OPERATING CASH FLOW & ANALYST
•An analyst should identify the major determinants
of operating cash flow.
•Positive operating cash flow can be generated by
the firm’s earnings related activities.
•Positive operating cash flow can also be generated
by decreasing non-cash working capital, such as
liquidating inventory and receivables or increasing
payables.
24
25. • Operating cash flow also provides a check of the
quality of a firm’s earnings.
• A stable relationship of operating cash flow and
net income is an indication of quality earnings
• Earnings that significantly exceed operating cash
flow may be an indication of aggressive
accounting choices. Ex: recognizing revenues too
soon or delaying the recognition of expenses.
• The variability of net income and operating cash
flow should also be considered.
25
26. INVESTING CASH FLOW
—The sources and uses of cash from investing
activities should be examined.
—A firm may reduce capital expenditure or sell
capital assets in order to save or generate cash.
—Increasing capital expenditure is usually an
indication of growth.
—Generating operating cash flow that exceeds
capital expenditures is a desirable trait.
26
27. FINANCING CASH FLOW
•This cash flow reveals information about whether
the firm is generating cash flow by issuing debt or
equity.
•This also provides information about whether the
firm is using cash to repay debts, re acquire stock or
pay dividends.
27
28. LINKAGES OF THE CASH FLOW STATEMENT WITH
THE INCOME STATEMENT AND BALANCE SHEET
•Cash is an asset. The statement of cash flows
ultimately shows the change in cash during an
accounting period.
•The beginning and ending balances of cash are
shown on the company’s balance sheets for the
previous and current years,
•and the bottom of the cash flow statement
reconciles beginning cash with ending cash.
28
29. The beginning and ending balance sheet values ofThe beginning and ending balance sheet values of
cash and cash equivalents are linked through thecash and cash equivalents are linked through the
cash flow statementcash flow statement..
BeginningBalance + - E n d in g Balance
B egin ning cash Cashreceipts(from
operating,investin g,
andfinancin g
activities)
Cashpayments
(foroperating,
in vestin g, and
financing activities)
Endingcash
29
30. Retained Earnings
BeginningBalance + - E n d in g Balance
B eg in n in g retained
earnings
Net income or minus
net loss from the
income statement for
year
Dividends Endingretained
earnings
30
31. • A company’s operating activities are reported on
an accrual basis in the income statement……………..
• Any differences between the accrual basis and the
cash basis of accounting for an operating
transaction result in an increase or decrease in
some (usually) short-term asset or liability on the
balance sheet.
31
32. For example
−if revenue reported using accrual accounting is
higher than the cash actually collected, the result
will be an increase in accounts receivable.
•If expenses reported using accrual accounting are
lower than cash actually paid, the result will be a
decrease in accounts payable
32
33. • A company’s investing activities typically relate to
the long-term asset section of the balance sheet,
and
• its financing activities typically relate to the equity
and long-term debt sections of the balance sheet.
• Each item on the balance sheet is also related to
the income statement and/or cash flow statement
through the change in the beginning and ending
balance.
33
34. Knowing any three of these four items makes it easy
to compute the fourth.
Understanding these interrelationships between the
balance sheet, income statement, and cash flow
statement is useful in not only understanding the
company’s financial health but also in detecting
accounting irregularities.
BeginningBalance + - E n d in g Balance
B e g in n in g A c c o u n ts
R e c e iv a b le
Income Statement
Revenue
Cash Collected from
Customers
EndingAccounts
Receivables
34
35. METHODS OF PRESENTING CASH FLOW
STATEMENT
There are two acceptable formats for reporting cash
flow from operations.
1.Direct method
2.Indirect method
35
37. DIRECT METHOD
•This method converts an accrual –basis income
statement into cash-basis income statement.
•That is, the direct method reports gross cash
receipts and cash disbursements related to
operations.
37
38. DIRECT METHOD……………Cont/………….
•Creditors preferred the direct method. The direct
method reports total amounts of cash flowing in
and out of a company from operating activities.
•This offers most analysts a better format to readily
assess the amount of cash inflows and outflow.
• When companies report using the direct method, they
must disclose a reconciliation of net income to cash flows
from operations (the indirect method) in a separate
schedule
38
39. INDIRECT METHODINDIRECT METHOD
•Under this method net income is converted to operating
cash flow by making adjustments for transactions that
affect net income but are not cash transactions.
These adjustments includesThese adjustments includes
•Eliminating non-cash expenses [depreciation/amortization]
•Non-operating items [gain/losses]
•Changes in balance sheet accounts [resulting from accrual
accounting events]
Total cash flow from operating activities is exactly the
same under both methods, only the presentation method is
different.
39
40. Statement of Cash Flows
• Consider first the net cash from operations.
Indirect method
41. Statement of Cash Flows
• Depreciation and amortization add-back.
Preparation of the Statement of Cash Flows
42. Statement of Cash Flows
• Adjustments for changes in balance sheet
accounts can be summarized as follows:
Preparation of the Statement of Cash Flows
43. STEPS IN PREPARING THE CASH FLOW STATEMENT
•The preparation of the cash flow statement uses data
from both the income statement and the comparative
balance sheets.
•As noted earlier, companies often only disclose indirect
operating cash flow information, whereas analysts
prefer direct-format information.
•Operating Activities: Direct Method
•Investing Activities: Direct Method
•Financing Activities: Direct Method
43
44. OPERATING ACTIVITIES: DIRECT METHOD
•First determine how much cash received from its
customers
•how much cash was paid to suppliers and to
employees as well as
•how much cash was paid for other operating
expenses, interest, and income taxes.
44
45. Cash Received from Customers
•To determine the cash receipts from its customers, it
is necessary to adjust this revenue amount by the
net change in accounts receivable for the year.
•If accounts receivable increaseIf accounts receivable increase during the year,
revenue on an accrual basis is higher than cashrevenue on an accrual basis is higher than cash
receipts from customersreceipts from customers, and vice versa.
45
46. Revenue $23,598
L e s s : In c re a s e in a c c o u n ts re c e iv a b le (55)
Cash re c e iv e d from customers $ 2 3 ,5 4 3
Cash re c e iv e d from c u s to m e r s a ff e c ts the a c c o u n ts r e c e iv a b le accounta s follows:
B e g in n in g a c c o u n ts receivable $957
P lu s revenue 23,598
Minus c a s h c o lle c te d from customers ( 2 3 ,5 4 3 )
Ending a c c o u n ts receivable $1,012
The a c c o u n ts r e c e iv a b le accountinformationcana ls o be p re s e n te d a s follows:
B e g in n in g a c c o u n ts receivable $957
P lu s re v e n u e 23,598
Minus endingaccounts receivable (1,012)
Cash c o lle c te d from customers $ 2 3 ,5 4 3
46
47. Cash Paid to Suppliers
−To determine purchases from suppliers, cost of goods sold
is adjusted for the change in inventory.
−If inventory increased during the year, then purchases
during the year exceeded cost of goods sold, and vice versa.
−If accounts payable increased during the year, then
purchases on an accrual basis are higher than they are on a
cash basis, and vice versa.
47
48. Cost of goods sold $11,456
Plus: Increase in inventory 707
Equals purchases from suppliers $12,163
Less: Increase in accounts payable (263)
Cash paid to suppliers $11,900
48
49. Once purchases have been determined, cash paid to
suppliers can be calculated by adjusting purchases
for the change in accounts payable.
49
50. Purchases from suppliers affect the inventory
account, as shown below
−The cash paid to suppliers was $11,900, determined as follows:
Beginning inventory $3,277
Plus purchases 12,163
Minus cost of goods sold (11,456)
Ending inventory $3,984
Purchases from suppliers $12,163
Less: Increase in accounts payable (263)
Cash paid to suppliers $11,900
50
51. Cash Paid to Employees
To determine the cash paid to employees, it is
necessary to adjust salary and wage expense by the
net change in salary and wage payable for the year.
If salary and wage payable increased during the year,If salary and wage payable increased during the year,
then salary and wage expense on an accrual basis isthen salary and wage expense on an accrual basis is
higher than the amount of cash paidhigher than the amount of cash paid for this expense,
and vice versa.
51
52. The amount of cash paid to employees is reflected in
the salary and wage payable account, as shown
below:
Salary and wage expense $4,123
Less: Increase in salary and wage payable (10)
Cash paid to employees $4,113
Beginning salary and wages payable $75
Plus salary and wage expense 4,123
Minus cash paid to employees (4,113)
Ending salary and wages payable $85 52
53. Cash Paid for Other Operating Expenses
•To determine the cash paid for other operating expenses, it is
necessary to adjust the other operating expenses amount on the incomeother operating expenses amount on the income
statement by the net changes in prepaid expenses and accrued expensestatement by the net changes in prepaid expenses and accrued expense
liabilities for the yearliabilities for the year.
•If prepaid expenses increasedprepaid expenses increased during the year, other operatingother operating
expenses on a cash basis were higher than on an accrual basisexpenses on a cash basis were higher than on an accrual basis, and
vice versa.
• Likewise, if accrued expense liabilities increasedif accrued expense liabilities increased during the year,
other operating expenses on a cash basis were lower than on anoperating expenses on a cash basis were lower than on an
accrual basisaccrual basis, and vice versa.
53
54. Cash Paid for Other Operating Expenses………….
Other operating expenses $3,577
Less: Decrease in prepaid expenses (23)
Less: Increase in other accrued
liabilities
(22)
Cash paid for other operating
expenses
$3,532
54
55. Cash Paid for Interest……………….
•To determine the cash paid for interest, it is necessary to
adjust interest expense by the net change in interest
payable for the year.
•If interest payable increasesIf interest payable increases during the year, then interestinterest
expense on an accrual basis is higher than the amount ofexpense on an accrual basis is higher than the amount of
cash paid for interestcash paid for interest, and vice versa.
Interest expense $246
Plus: Decrease in interest payable 12
Cash paid for interest $258
55
56. Alternatively, cash paid for interest may also be determined
by an analysis of the interest payable account, as shown
below:
Beginning interest payable $74
Plus interest expense 246
Minus cash paid for interest (258)
Ending interest payable $62
56
57. Cash Paid for Income Taxes…………………………….
•To determine the cash paid for income taxes, it is necessary
to adjust the income tax expense amount on the income
statement by the net changes in taxes receivable, taxes
payable, and deferred income taxes for the year.
•If taxes receivable or deferred tax assets increase during
the year, income taxes on a cash basis will be higher than on
an accrual basis, and vice versa.
•Likewise, if taxes payable or deferred tax liabilities increase
during the year, income tax expense on a cash basis will be
lower than on an accrual basis, and vice versa.
57
58. Cash Paid for Income Taxes…………………………….
Income tax expense $1,139
Less: Increase in income tax payable (5)
Cash paid for income taxes $1,134
58
59. INVESTING ACTIVITIES: DIRECT METHOD***
•The second and third steps in preparing the cash flow statement are to
determine the total cash flows from investing activities and from
financing activities.
•The presentation of this information is identical, regardless of whether
the direct or indirect method is used for operating cash flows. Investing
cash flows are always presented using the direct method.
FINANCING ACTIVITIES: DIRECT METHOD***
•As with investing activities, financing activities are always presented
using the direct method
59
60. • Total Liabilities = Total liabilities - Par value of preferred
stock
• The higher ratio indicates that the company has lost some
ground with respect to covering all its debts with net
tangible assets.
60
61. COMMON SIZE CASH FLOW STATEMENT
• In common-size analysis of a company’s income
statement, each income and expense line item is
expressed as a percentage of net revenues (net sales).
• For the common-size balance sheet, each asset, liability,
and equity line item is expressed as a percentage of total
assets.
61
62. • For the common-size cash flow statement, there are two
alternative approaches.
•
• The first approach is to express each line item of cash
inflow (outflow) as a percentage of total inflows
(outflows) of cash.
• second approach is to express each line item as a
percentage of net revenue.
62
63. FREE CASH FLOWFREE CASH FLOW
The excess of operating cash flow over capital expenditures
is known generically as free cash flow.
For purposes of valuing a company or its equity securities,
an analyst may want to determine a more precise free cash
flow measure.
Methods of Measure of Free cash flowMethods of Measure of Free cash flow
1. free cash flow to the firm (FCFF)free cash flow to the firm (FCFF)
2.2.free cash flow to equity (FCFE).free cash flow to equity (FCFE).
63
64. FREE CASH FLOW TO THE FIRMFREE CASH FLOW TO THE FIRM
• Free cash flow to the firm [FCFF] is the cash available to
all investors, both equity owners and debt holders.
• FCFF can be calculated by starting with either net income
or operating cash flow.
64
65. FREE CASH FLOW TO EQUITY
Free cash flow to equity [FCFE] is the cash flow that would
be available for distribution to common shareholders.
65
66. CASH FLOW RATIOSCASH FLOW RATIOS
• The cash flow statement can be analysed by comparing the
cash flows either over time or to those of other firmseither over time or to those of other firms.
• profits are very important for a company. companies thatcompanies that
appear very profitable can actually be at a financial risk ifappear very profitable can actually be at a financial risk if
they are generating little cash from these profitsthey are generating little cash from these profits
• For example, if a company makes a ton of sales on credit, they
will look profitable but haven't actually received cash for the
sales, which can hurt their financial health since they have
obligations to pay.
• Cash flow ratios can be categorizedCash flow ratios can be categorized
Performance ratioPerformance ratio
Coverage ratioCoverage ratio 66
68. Cash flow-to-revenue
The cash flow-to-revenue ratio, also known as the
operating cash flow-to-sales ratio or the cash flow-
to-sales ratio, is the ratio of operating cash flow to
revenue.
It indicates management's ability to turn revenuemanagement's ability to turn revenue
into profits and net cash flowinto profits and net cash flow.
68
69. •Management, investors and other stakeholders can use
the cash flow-to-revenue ratio to evaluate the
effectiveness of internal cost controls.
•A high ratio usually means the company is able to turnable to turn
a higher percentage of its revenue into profits and neta higher percentage of its revenue into profits and net
cash flow.cash flow.
•A flat or increasing trend line is generally an indicationindication
of consistent sales growth and effective expenseof consistent sales growth and effective expense
management.management.
•Poor receivables collection and higher expensesPoor receivables collection and higher expenses are
some of the reasons for a declining trend line. 69
70. Operating cash flow depends on net income, which is
revenue minus expenses. Therefore, if a company
generates higher revenue, it must keep expenses steady
relative to revenue to drive operating cash flow and the
cash flow-to-revenue ratio higher.
If revenue declines, the company must make a
corresponding reduction in expenses to maintain the
same cash flow-to-revenue ratio.
Other strategies to increase the ratio include using
credit instead of cash for purchases, tightening credit
requirements and following up on overdue accounts.70
71. Cash return-on-asset ratio
cash return on assets is designed to measure
management’s success in making operating decisions
Cash return on assets measures management’s
success in generating cash from operating
activities.
Because CFO is available to pay dividends and to
finance investments, a high ratio is desirable.
71
72. • This ratio used to compare a businesses performance
among other industry members.
• The ratio can be used internally by the company's
analysts, or by potential and current investors.
• When a high cash return on assets ratio is listed, it can
indicate to investors that a higher return is anticipated.
• This is due to the theory that the higher the ratio, the
more cash the company has made available for
reinvestment in the company either through
replacements.
72
73. Cash Return On Equity Ratio
The cash return on equity ratio is the ratio of cash
flow from operations to average shareholders'
equity.
This ratio measures the amount of cash generated
from operations per one dollar of average
shareholders' equity.
73
74. Cash flow per shareCash flow per share
A measure of a firm's financial strength
•Many analysts and investors place more weight on
cash flow per share than earnings per share.
•Because EPS is more easily manipulated, its reliability
can at times be questionable. Cash, on the other
hand, is difficult to fake.
•Therefore, cash flow per share is a useful measure formeasure for
the strength of a firm and the sustainability of itsthe strength of a firm and the sustainability of its
business model.business model.
74
75. Cash flow per share...........................Cash flow per share...........................
•cash flow per share takes into consideration a
company's ability to generate cash.
•it is regarded by some analysts as a more accurate
measure of a company's financial situation than the
earnings per share metric.
75
76. COVERAGE RATIO
i.Debt coverage ratio
ii.Cash flow interest coverage ratio/Interest
coverage Ratio
iii.Reinvestment ratio
iv.Dividend payment ratio
v.Free Cash Flow to Operating Cash Flow Ratio
76
77. Debt-Coverage Ratio/Debt-Coverage Ratio/Cash Flow Coverage RatioCash Flow Coverage Ratio
•The cash flow coverage ratio is an indicator of the ability of
a company to pay interest and principal amount.
•This ratio tells the number of times the financial obligations
of a company are covered by its earnings.
•A ratio equal to 1 or more than 1 means
- good financial health
– meet its financial obligations through the cash
generated by operating activities.
•A ratio of less than one is an indicator of bankruptcy of the
company within two years if it fails to improve its financial77
78. Debt-Coverage Ratio/Cash Flow Coverage Ratio…………..cont/……
―It is an important indicator of the liquidity position of a
company.
Cash Flow Coverage Ratio = Operating Cash Flows / Total
Debt
Cash Flow Coverage Ratio = (Net Earnings + Depreciation
+ Amortization) / Total Debt
78
79. Cash flow interest coverage ratio/InterestCash flow interest coverage ratio/Interest
coverage Ratiocoverage Ratio
• This ratio measures the firm’s ability to meet itsfirm’s ability to meet its
interest obligationsinterest obligations
• Interest coverage is regarded as a measure of a
company’s creditworthiness
• Banks and financial analystsfinancial analysts also rely on this ratio as
a rule of thumb to measure the fundamentalfundamental
strength of a business.strength of a business.
79
81. Dividend Payment RatioDividend Payment Ratio
This ratio measures the firm’s ability to make dividend
payments from operating cash flow.
81
82. 82
Free Cash Flow to Operating Cash Flow RatioFree Cash Flow to Operating Cash Flow Ratio
• Ratio measures the relationship between free cash flow
and operating cash flow.
• FCF considered to be an essential outflow of funds to
maintain a company's competitiveness and efficiency.
• FCF available to a company to use for expansion,
acquisitions, and/or financial stability .
• The higher the percentage of this ratio indicates that
company is in the greater financial strength.
83. 83
HOW TO TEST SOLVENCY WITH CASH FLOWHOW TO TEST SOLVENCY WITH CASH FLOW
RATIOSRATIOS
• Creditors and lenders began using cash flow ratios
because
• those ratios give more information about a company's
ability to meet its payment commitments than
traditional balance sheet working capital ratios.
• Traditional working capital ratios indicate how much
cash the company had available on a single date in the
past.
84. 84
HOW TO TEST SOLVENCY WITH CASH FLOW RATIOS…………………………………………………………………………..HOW TO TEST SOLVENCY WITH CASH FLOW RATIOS…………………………………………………………………………..
Cash flow ratios, on the other hand, test
how much cash was generated over a period of time and
compare that to near-term obligations,
giving a dynamic picture of what resources the company
must have to meet its commitments.
85. 85
Operating cash flow (OCF/CFO) RatioOperating cash flow (OCF/CFO) Ratio
[Company's ability to generate resources to meet current liabilities]
• The numerator of the OCF ratio consists of net cash provided by
operating activities.
• The denominator is all current liabilities, taken from the balance
sheet.
Operating cash flow (OCF) =
86. 86
Operating Cash MarginOperating Cash Margin
• Thus, the operating cash margin ratio indicates
performance based on cash generating ability –
as opposed to a profit margin ratio with its focus on
accrual based accounting income.
• This ratio is useful to evaluate cash managementcash management
performanceperformance, as well as, credit granting policiescredit granting policies and
receivable collections.
• it is more effective to focus a comparative analysis on
companies within the same industry
87. 87
Cash Generating PowerCash Generating Power
The ratio demonstrates a company’s ability to generate
cash and the proportion of the cash generated solely by
operations compared to the total cash inflow
Year to year comparisons of the cash generating power
for a company should be evaluated, as well as,
comparisons with industry competitors.
Significant decreases in the ratio over time would be a
source of concern that merits investigation.
88. 88
External Financing IndexExternal Financing Index
This ratio compares cash flows provided by financing activities
with cash generated from operations.
The ratio indicates the extent of dependenceextent of dependence on external
sources as a means of financing.
The larger the ratio, the more dependent a company is on
external funding and this can lead to higher level of
financial risk.
OperationsfromFlowCash
ActivitiesFinancingfromFlowCash
IndexFinancingExternal =
89. 89
Capital Asset RatioCapital Asset Ratio
• The capital asset ratio shows a company’s ability to meet itsThe capital asset ratio shows a company’s ability to meet its
capital expenditure needs from cash generated bycapital expenditure needs from cash generated by
operating activities rather than from financing activitiesoperating activities rather than from financing activities
• A ratio of 1.0 or greater means that debt financing is not
necessary for capital expenditures.
nsAcquisitioAssetCapitalforOutflowsCash
DividendsforPaidCash-DisposalAssetCapitalfromInflowsCashCFO
RatioAssetCapital
+
=
90. 90
Earnings QualityEarnings Quality
In the earnings quality ratio both CFO and net income are
adjusted for the effects of interest and income taxes that
result from differences between cash payments versus
accruals and deferrals.
This provides the extent of deviation between operating cash
flows and reported earnings.
Non-cash items such as depreciation, amortization, losses
and gains, are a typical cause for normal deviation of CFO
from earnings.
91. 91
• However, the underlying cause of any potentially abnormal
or substantial deviations needs to be investigated.
• Therefore, during the evaluation process it is important to
not only understand that a difference exists and to monitor
its direction and size, it is equally important to identify the
underlying cause.
• For example, based on comparisons over time, an earnings
quality ratio that is falling increasingly further below 1.0
could indicate a possible problem such as fictitious
receivables or unrecorded payables.
92. 92
Accounting Shenanigans on the Cash Flow Statement
– Investors’ increasedInvestors’ increased focus on the cash flow
statement is beneficial.
– Analysing the cash flow statement is integralintegral
partpart to understanding a company’s financial
performance and position
– because it often provides a check to the qualityprovides a check to the quality
of the earningsof the earnings shown in the income statement.
93. 93
CASH FLOW MANIPULATION
Accrual accounting is easily manipulated because of the
many estimates and judgements involvedmany estimates and judgements involved.
Management has several ways to manipulate operating
cash flow, including
• deciding how to allocate cash flow between categories
• changing the timing of receipts of cash flows.
•A financial analyst should investigate the quality of a
company’s cash flows and determine whether increases in
operating cash flow are sustainable.
95. 95
Stretching Accounts payablesStretching Accounts payables
•Transaction with suppliers is usually reported as operating
activities in the cash flow statement.
•A firm can temporarily increase operating cash flow by
simply stretching accounts payable[delaying payments]
• delaying payment is no-cost financing.
•stretching payables is not a sustainable source of increased
cash flows, since suppliers may refuse to extend credit.
96. 96
Stretching Accounts payables...................../cont....
One way to determine whether a firm is stretching its
payable is to examine the number of days in accounts
payable./days accounts payable (Days A/P)
As a rule of thumb, a well managed company's days
accounts payable do not exceed 40 to 50 days.
97. 97
Financing Accounts payables
By entering into a financial agreement with 3rd
party[financial
institution] can delaying cash payment.
Financing accounts payable allows the firm to manage the timing
of the reporting operating cash flow.
When accounts payable due---------------financial institutor makes
the payment to suppliers on behalf of firm-----then firm
reclassifies the A/C payable to short-term financing.
98. 98
• So firm might time the arrangement. By doing so, lower CFO is
offset by higher operating cash flow from other sources
Ex:
1. seasonal cash flow
2. Cash flow from receivables sales/ securitization
When the firm repays to the financial institution, report the cash
outflow as financing activity not an operating activity.
That means the firm has delayed the out flow of cash.
Financial institution will charge a fee to handle this arrangements.
99. 99
Borrowing against receivables/Securitizing Accounts
Receivables
• A firm can convert A/C receivables into cash by
• Borrowing against the receivables[collateral]
• Selling securitizing the receivables
• When borrowing [use receivables as collateral] the
inflow of cash is reported as financing activity
100. 100
Securitizing Accounts Receivables
• Companies will securitize illiquid assets into liquid assets in
order to increase their overall liquidity.
• Accounts receivable securitization is the process of bundling
together the accounts receivables asset and selling that to
investors as a security.
The inflow of cash is reported as an operating activity in the
cash flow statement -------- since transaction is reported as a
sale.
101. 101
Securitizing Accounts Receivables....................
• Securitising may affect earnings ----- securitizing of receivables
may give gain in some cases.
— At the time of securitization gain is the result of difference
between book value and fair value.
— Through number of estimates
Expected default rate
Expected payment rate
Discount rate.
102. 102
Benefits of Securitizing
1. Securitized debt has a lower interest cost than corporate debt
2. Securitization can increase a companies total liquidity
3. Securitization can enhance the enterprise value
AR securitization is only available to large companies having broad
customer base.
When the firm has limited amounts of AR, increasing/ accelerating
CFO is not suitable.
103. 103
Repurchasing Stock to Offset Dilution
When a firm’s stock options are exercised, shares must be Issued
When stock price[mkt] > Exercise price, then more shares will be
issued.....EPS will be diluted as shares are issued.
Firms often repurchase stock to offset the dilutive effects of stock
option exercise
Cash received from option[inflow] cash
outflow[repurchase]...both reported as financing activities. Since
there is tax benefit when options are exercised.
For analytical purpose, net cash outflow for share repurchase[to
avoid dilution] should be reclassified from financing activities to
operating activities.
104. 104
"Stock options are contracts; they don't represent ownership in
anything. They are merely contracts that grant you certain rights".
Option that gives its holder the right to buy or sell a firm's common
stock (ordinary shares) at a specified price and by a specified date.
call option - an option to buy
put option - an option to sell
The "Call" option gives its buyer the right to "buy" shares of a stock
at a specified price on or before a given date.
The "Put" option gives its buyer the right to "sell" shares of a stock at
a specified price on or before a given date.
105. 105
Definition of 'Exercise Price
The price at which the underlying security can be purchased (call
option) or sold (put option)
The exercise price is determined at the time the option contract is
formed.
106. 106
An employee stock option (ESO)
It is a call option on the common stock of a company, granted by
the company to an employee as part of the employee's
remuneration package.
The objective is to give employees an incentive to behave in ways
that will boost the company's stock price.
If the company's stock market price rises above the call price, the
employee could exercise the option, pay the exercise price and
would be issued with ordinary shares in the company.
107. 107
An employee stock option (ESO) …………………………
The employee would experience a direct financial benefit of the
difference between the market and the exercise prices.
Another substantial reason that companies issue employee stock
options as compensation is to preserve and generate cash flow.