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Engineering Economy.
Engineering Economy, Engineering, Economy, Business and Economy, Business, Economics, Finance, Accounting,

Engineering Economy.
Engineering Economy, Engineering, Economy, Business and Economy, Business, Economics, Finance, Accounting,

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Cash flow statement

  1. 1. 4. Cash Flows Statement  The business operating cycle: How a business earns its cash  Sources and Uses of Cash  The engineer’s focus on the investing section: Capital Budgeting Contemporary Engineering Economics, 5th edition. ©2010
  2. 2. Cash Flow Transactions within Business Contemporary Engineering Economics, 5th edition. ©2010 Shareholders Fixed Assets Debt holders Inventory Government Customers CASH From cash sales To pay taxes From credit sales To pay labor, materials, and overhead To pay interest and principal From sale of debt To purchase From sale To pay dividend, To purchase back shares From sale of shares
  3. 3. Cash Flow Statement Contemporary Engineering Economics, 5th edition. ©2010 Cash flow statement describes the cash inflows and outflows of an enterprise during a period. This statement reports cash inflows and outflows based on the firm’s operating activities, investing activities, and financing activities. Change in cash = Cash from operations + Cash from investment + Cash from financing
  4. 4. Cash Flow from Operating Activities Cash Inflow From sales of goods or services From interest and dividend income From sales of goods or services From interest and dividend income Cash Outflow To pay suppliers for inventory To pay employees for services To pay lenders (interest) To pay government for taxes To pay other suppliers for other operating expenses To pay suppliers for inventory To pay employees for services To pay lenders (interest) To pay government for taxes To pay other suppliers for other operating expenses Contemporary Engineering Economics, 5th edition. ©2010 •It shows impact of transactions not defined as investing or financing activities. •These cash flows are generally the cash effects that enter into the determination of net income.
  5. 5. Importance of Cash Flow from Operating Activities It would seem more logical to classify interest and dividend income as an “investing” inflow, while interest paid certainly looks like a “financing” outflow. But the SSAP (Statement of Standard Accounting Practices) and FRS (Financial Reporting Standard) classified these items as operating flows.  In the long run, a business must generate a positive net cash flow from its operating activities if the business is to survive. A business with negative cash flows from operations will not be able to raise cash from other sources indefinitely.  In fact, the ability of a business to raise cash through financing activities is highly dependent upon its ability to generate cash from its normal business operations. Creditors and stockholders are reluctant to invest money in a company that does not generate enough cash from operating activities to assure prompt payment of maturing liabilities, interest and dividends. Contemporary Engineering Economics, 5th edition. ©2010
  6. 6. Cash Flow from Investment Activities Cash Inflow From sale of fixed assets (property, plant and equipment) From sale of debt or equity securities (other than common equity) of other entities From sale of fixed assets (property, plant and equipment) From sale of debt or equity securities (other than common equity) of other entities Cash Outflow To acquire fixed assets (property, plant and equipment) To purchase debt or equity securities (other than common equity) of other entities To acquire fixed assets (property, plant and equipment) To purchase debt or equity securities (other than common equity) of other entities Contemporary Engineering Economics, 5th edition. ©2010 It shows impact of buying and selling fixed assets and debt or equity securities of other entities.
  7. 7. Cash Flow from Financing Activities Cash Inflow From borrowing (Short-term and long-term) From sale of firm’s own equity securities (i.e. by issuing stock) Cash Outflow To repay amounts borrowed To repurchase firm’s own equity securities To pay shareholders’ dividends Contemporary Engineering Economics, 5th edition. ©2010 It shows impact of all cash transactions with shareholders and the borrowing and repaying transactions with lenders
  8. 8. Contemporary Engineering Economics, 5th edition. ©2010 The Cash Flow – Business Cycle Inventory Production Cash Accounts receivable Fixed assets Cash Sales Credit Sales Collection of receivable Investment Depreciation • Changes in equity • Changes in liabilities • Pay taxes • Pay interest • Pay dividends • Labor • Materials • Overhead
  9. 9. The Cash Flow Statement of SABIC – Illustration Contemporary Engineering Economics, 5th edition. ©2010 Period End Date 12/31/2011 12/31/2010 CASH FROM OPERATING ACTIVITIES + Net Income 29,241.75 21,528.67 + Depreciation & Amortization (writing off an intangible asset investment) 11,815.33 10,609.85 + Other Non-Cash Adjustments 17,070.40 11,169.38 + Changes in Non-Cash Capital -15,983.02 -13,682.96 Cash From Operations 42,144.46 29,624.94 CASH FROM INVESTING ACTIVITIES + Disposal of Fixed Assets 0.00 0.00 + Capital Expenditures (Physical assets) -10,641.97 -16,100.22 + Increase in Investments 0.00 0.00 + Decrease in Investments 5.14 24.56 + Other Investing Activities -1,613.34 -3,986.87 Cash From Investing Activities -12,250.17 -20,062.54 CASH FROM FINANCING ACTIVITIES + Dividends Paid -11,831.28 -8,961.98 + Change in Short-Term Borrowings 212.92 180.73 + Increase in Long-Term Borrowings 0.00 3,406.67 + Decrease in Long-term Borrowings -8,310.21 0.00 + Increase in Capital Stocks (Preferred & Common) 0.00 0.00 + Decrease in Capital Stocks (Preferred & Common) 0.00 0.00 + Other Financing Activities -10,224.74 -10,736.63 Cash from Financing Activities -30,153.31 -16,111.20 Net Changes in Cash -259.02 -6,548.80
  10. 10. The Cash Flow Statement of SABIC – Illustration Contemporary Engineering Economics, 5th edition. ©2010 Period End Date 12/31/2011 12/31/2010 CASH FROM OPERATING ACTIVITIES + Net Income 29,241.75 21,528.67 + Depreciation & Amortization (writing off an intangible asset investment) 11,815.33 10,609.85 + Other Non-Cash Adjustments 17,070.40 11,169.38 + Changes in Non-Cash Capital -15,983.02 -13,682.96 Cash From Operations 42,144.46 29,624.94 CASH FROM INVESTING ACTIVITIES + Disposal of Fixed Assets 0.00 0.00 + Capital Expenditures (Physical assets) -10,641.97 -16,100.22 + Increase in Investments 0.00 0.00 + Decrease in Investments 5.14 24.56 + Other Investing Activities -1,613.34 -3,986.87 Cash From Investing Activities -12,250.17 -20,062.54 CASH FROM FINANCING ACTIVITIES + Dividends Paid -11,831.28 -8,961.98 + Change in Short-Term Borrowings 212.92 180.73 + Increase in Long-Term Borrowings 0.00 3,406.67 + Decrease in Long-term Borrowings -8,310.21 0.00 + Increase in Capital Stocks (Preferred & Common) 0.00 0.00 + Decrease in Capital Stocks (Preferred & Common) 0.00 0.00 + Other Financing Activities -10,224.74 -10,736.63 Cash from Financing Activities -30,153.31 -16,111.20 Net Changes in Cash -259.02 -6,548.80

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