The document discusses cash flow statements, which show how changes in balance sheet accounts affect cash. It defines cash flow statements as having three classifications: operations, investing, and financing. It provides examples of cash flows that fall under each classification and discusses key components and preparation methods of the statement of cash flows. The document also covers issues in cash flow analysis, such as time horizons, biases, and the time value of money.

1. Presentation of Issues in Cash Flow Analysis Presented By: Submitted To:Group D Dr.Devendra SinghPGDM/A

2. Cash flow statementIn financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.

3. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.

4. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements.

5. People and groups interested in cash flow statements include:Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expensesPotential lenders or creditors, who want a clear picture of a company's ability to repayPotential investors, who need to judge whether the company is financially sound

6. Contd…Potential employees or contractors, who need to know whether the company will be able to afford compensationShareholders of the business.

7. The cash flow statement is intended toprovide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstancesprovide additional information for evaluating changes in assets, liabilities and equityimprove the comparability of different firms' operating performance by eliminating the effects of different accounting methodsindicate the amount, timing and probability of future cash flows

8. The cash flow statement has been adopted as a standard financial statement because it eliminates allocations, which might be derived from different accounting methods, such as various timeframes for depreciating fixed assets.

9. Overview of the Statement of Cash FlowsThe statement of cash flows … (a) explains the reasons for a change in cash. (b) classifies the reasons for the change as an operating, investing or financing activity. (c) reconciles net income with cash flow from operations.

10. 3 CLASSIFICATIONS OF CASH FLOW

11. Define the Three Classifications of Cash Flows1.Operations – cash flows related to production,sellinggoods and services; that is, the principle business of the firm.2. Investing – cash flows related to the acquisition or sale of noncurrent assets.3. Financing – long term and short term cash flows related to liabilities and owners’ equity; dividends are a financing cash outflow.

12. operating cash flows includeReceipts from the sale of goods or servicesReceipts for the sale of loans, debt or equity instruments in a trading portfolioInterest received on loansDividends received on equity securitiesPayments to suppliers for goods and servicesPayments to employees or on behalf of employeesInterest payments (alternatively, this can be reported under financing activities in IAS 7, and US GAAP)

13. Examples of Investing activities arePurchase of an asset (assets can be land, building, equipment, marketable securities, etc.)Loans made to suppliers or customers

14. Financing activities include Proceeds from issuing short-term or long-term debtPayments of dividendsPayments for repurchase of company sharesRepayment of debt principal, including capital leasesFor non-profit organizations, receipts of donor-restricted cash that is limited to long-term purposes

15. Components of the Statement of Cash FlowsCash received fromsale of goodsand servicesCash paid foroperating goodsand servicescash flowfrom operations-=OperationInvestingfinancing+ -cash flowfrom investingCash received fromsales of investmentsand PP&ECash paid for ac-quisition of invest-ments and PP&E-=+ -Cash paid for dividends and reacquisition of debt or capital stockCash received fromissue of debt orcapital stockcash flowfrom financing-==Net change in cashfor the period

16. Changes in Specific AccountsNon-cash assetsLiability &Share-Holder’s equityincreasedecreaseIf noncash assetsare increased, then cash was spent,so cash is an outflow,so negative sign.If noncash assetsare decreased,then they provided cashso cash is an inflow,so positive sign.If liab. or S.E.increased, then cashwas obtained,so cash is an inflow,so positive sign.If liab. or S.E.decreased, then cashwas spent,so cash is an outflow,so negative sign.

17. Preparation methodsIndirect methodDirect method

18. DIRECT METHODCash flows from (used in) operating activities

19. Cash flows from (used in) investing activitiesCash flows from (used in) financing activities

20. Indirect method Citigroup Cash Flow StatementOperating activities, cash flows provided by or used in:

21. Investing activities, cash flows provided by or used in:

22. Comparison of Cash Flow to Net IncomeNet income is an accrual based concept and purports to show the long-term.Cash flows purport to show the short term.Consider the outlook for both short-term and long-term and consider that each is either good or poor.A strong growing firm would show both good long-term and good short-term outlooks.

23. Contd…A failing firm would show both poor long-term and poor short term outlooks.What about a firm with good cash flows (short-term) but poor net income (long-term)?What about a firm with poor cash flows (short-term) but good net) income (long-term?

24. Issues To Cash Flow AnalysisTime horizon for analysis of cash flowBiases in cash flow statementsTime Value Of Money

25. ISSUES IN CASH FLOW ANALYSIS

26. Issues To Cash Flow AnalysisTime horizon for analysis of cash flow :Physical life of the plant

27. Technologies life of the plant

28. Product market life of the plant

29. Investment planning horizon of the firmBiases in cash flow statementsAs a cash flows have to be forecast far into the future, errors in estimation are bound to occur. Yet, given the critical importance of cash flow forecasts in projects evaluation, adequate care should be take to guard certain biases which may lead to overstatement or understatement of the true project profitability

30. Overstatement of profitabilityIntentional overstatement

31. Lack of experience

32. Myopic euphoria