CFA CFA CFA CFA CFA CFA

1. CASH FLOW ANALYSIS

2. Objectives:
1. Understand the usefulness of statement
of the cash flows as far as decision
making is concerned
2. Know the classification of the cash flow
activities
3. Be familiar with the content and forms of
the statement of cash flows
4. Calculate the cash flows from operating
activities

3. STATEMENT OF CASH FLOW
• The statement of cash flow is a financial report
that records a company’s cash inflows and outflows
at a given time.
• It is one of the most essential elements in the
financial management of a company since it is an
important indicator of the firm’s liquidity.
Brigham, E. and Ehrhardt, M., 2011. Financial Management: Theory and Practice. 13th ed. Ohio:
South-Western Publishing

4. STATEMENT OF CASH FLOW
The company’s liquidity helps make the following decisions:
1. How much input can we buy?
2. Can we purchase in cash or is it necessary to request credit?
3. Should we collect in cash or can we grant credit?
4. Can we pay off debts when due or must we ask for refinancing?
5. Can we invest the surplus of money in new financial
instruments or projects?
https://connectamericas.com/content/cash-flow-and-its-importance-decision-making-process

5. CLASSIFICATION OF CASH FLOWS ACTIVITIES
- records a company's
operating cash movement,
the net of which is where
operating cash flow (OCF)
is derived
OPERATING
ACTIVITIES
INVESTING
ACTIVITIES
- records changes in
cash from the purchase
or sale of property,
plants, equipment, or
generally long-term
investments
- reports cash level changes
from the purchase of a
company’s own stock or
issue of bonds and payments
of interest and dividends to
shareholders
Brigham, E. and Ehrhardt, M., 2011. Financial Management: Theory and Practice. 13th ed. Ohio: South-Western Pub.
FINANCING
ACTIVITIES
transactions involving the
acquisition or disposal of
noncurrent assets
(PPEs – Property, Plants
And Equipment)
transactions and events
involving creditors and
owners
transactions and events that
enter into the determination
of net income
(operation of the business)

6. Cash inflows:
• From sale of goods or services
• From interest received and
dividends received
OPERATING ACTIVITIES
CLASSIFICATION OF CASH FLOWS ACTIVITIES
Sample Transactions
Cash outflows:
• To suppliers for inventory
• To employees for wages
• To government for taxes
• To lenders for interest
• To others for expenses
Brigham, E. and Ehrhardt, M., 2011. Financial Management: Theory and Practice. 13th ed. Ohio: South-Western Pub.
transactions and events that enter into the
determination of net income
(operation of business)

7. Cash inflows:
• From sale of property, plant,
and equipment
• From sale of investments in
debt or equity securities of
• From collection of principal
on loans to other entities
INVESTING ACTIVITIES
CLASSIFICATION OF CASH FLOWS ACTIVITIES
Sample Transactions
Cash outflows:
• To purchase property, plant, and
equipment
• To purchase investments in debt
or equity securities of
• To make loans to other entities
Brigham, E. and Ehrhardt, M., 2011. Financial Management: Theory and Practice. 13th ed. Ohio: South-Western Pub.
transactions involving the acquisition or
disposal of noncurrent assets
(PPEs/ property, plant and equipment)

8. Cash inflows:
• From sale of common stock
• From issuance of debt (bonds and
notes)
FINANCING ACTIVITIES
CLASSIFICATION OF CASH FLOWS ACTIVITIES
Sample Transactions
Cash outflows:
• To stockholders as dividends
• To redeem long-term debt or
reacquire capital stock (treasury
stock)
Brigham, E. and Ehrhardt, M., 2011. Financial Management: Theory and Practice. 13th ed. Ohio: South-Western Publishing
transactions and events involving creditors
and owners

9. ____1. Investment of owner
____2. Purchase of service vehicle
____3. Payment of electricity bill
____4. Service Revenue
____5. Purchase of computer
____6. Owner's drawing
____7. Payment of insurance
____8. Cash Donation
____9. Purchase of adjacent lot
____10. Payment on rent
Identify the cash flow activities. Write O for Operating, I for Investing
or F for Financing Activities
CLASSIFICATION OF CASH FLOWS ACTIVITIES
Activity 1
F
O
O
I
O
I
O
O
I
F

10. FORMS OF STATEMENT OF CASH FLOWS
This method draws data from the
income statement using cash
receipts and cash disbursements
from operating activities. The net of
the two values is the operating cash
flow (OCF).
DIRECT METHOD INDIRECT METHOD
https://www.investopedia.com/articles/investing/102413/cash-flow-statement-reviewing-cash-flow-operations.asp
This method starts with net income
and converts it to OCF by adjusting
for items that were used to calculate
net income but did not affect cash.

11. FORMS OF STATEMENT OF CASH FLOWS
Sample 1
https://www.brixx.com/direct-vs-indirect-cash-flow-methods-whats-the-difference/

12. FORMS OF STATEMENT OF CASH FLOWS
Sample 2
https://stratafolio.com/guide-direct-cash-flow-indirect-cash-flow/

13. FORMS OF STATEMENT OF CASH FLOWS
It helps you identify cash related problems
or opportunities that might be hidden with
the indirect method.
Non-cash items are ignored.
Goes hand in hand with cash flow
forecasting to make better decisions about
the future.
Requires a supplemental reconciliation of
net income to cash flow from operating
activities
https://www.brixx.com/direct-vs-indirect-cash-flow-methods-whats-the-difference/

14. FORMS OF STATEMENT OF CASH FLOWS
Sample 1
It can be quick to generate. No
supplemental schedule is required
The indirect method is still very useful for
reconciling your net profit with your
closing cash position.
Used by 97.5% of companies.
https://www.brixx.com/direct-vs-indirect-cash-flow-methods-whats-the-difference/

15. https://www.investopedia.com/articles/investing/102413/cash-flow-statement-reviewing-cash-flow-operations.asp
FORMS OF STATEMENT OF CASH FLOWS
Activity 2
Which is the Direct Method and the Indirect Method?
A. B.

16. “If I had to run a company on three measures,
those measures would be customer satisfaction,
employee satisfaction, and cash flow.”
John Francis “Jack” Welch Jr.
General Electric CEO 1981-2001

17. Thank you and God bless!