Chapter 7

Funds Analysis, CashFlow Analysis, and Financial Planning

After studying Chapter 7, you should be able to:

Explain the difference between the flow of funds (sources and uses of funds) statement and the statement of cash flows -- and understand the benefits of using each !efine "funds" and identify sources and uses of funds Create a sources and uses of funds statement, ma#e ad$ustments, and analy%e the final results !escribe the purpose and content of the statement of cash flows as well as implications that can be drawn from it Prepare a cash budget from forecasts of sales, receipts, and disbursements -- and #now why such a budget should be flexible !e&elop forecasted balance sheets and income statements 'nderstand the importance of using probabilistic information in forecasting financial statements and e&aluating a firm(s condition

Funds Analysis, Cash-Flow Analysis, and Financial Planning

Flow

of Funds ()ources and 'ses) )tatement Accounting )tatement of Cash Flows Cash-Flow Forecasting

Flow of Funds Statement

A summary of a firm*s changes in financial position from one period to another+ it is also called a sources and uses of funds statement or a statement of changes in financial position

Flow of Funds Statement ,hat are -funds./ funds

All of the firm*s investments and claims against those in&estments Extends beyond $ust transactions in&ol&ing cash

Sources and ses Statement

0he letters labeling the boxes stand for 'ses, ses )ources, ources Assets, ssets and 1iabilities (broadly defined) 0he pluses (minuses) indicate increases (decreases) in assets or liabilities

A ) ' 2

1 2 -

!"#s $etermination of Sources and ses

Assets Cash and C E Acct >ec ?n&entories Prepaid Exp Accum 0ax Prepay =55B 3 95 <96 797 8 45 3 =557 455 645 747 8 9 4,465 9<5 (=99) 7<4 85 ==< =,566 2;2 2 );' ) ) ' -' :;A :;A :;A ' ---

3 Current Assets 3 4,498 Fixed Assets (@Cost) 45<5 1essA Acc !epr (<=9) :et Fix Assets 3 B54 ?n&estment, 10 85 Cther Assets, 10 ==< 3

!"#s $etermination of Sources and ses

Assets Cash and C E Acct >ec ?n&entories Prepaid Exp Accum 0ax Prepay =55B 3 95 <96 797 8 45 3 =557 2;- );' 455 345 ) 645 47 ) 747 D5 ' 8 -9 4 ' 4,465 :;A 9<5 :;A (=99) :;A 7<4 B5 ' 85 -==< -=,566

Current Assets 3 4,498 Fixed Assets (@Cost) 45<5 1essA Acc !epr (<=9) :et Fix Assets 3 B54 ?n&estment, 10 85 Cther Assets, 10 ==<

3 3

!"#s $etermination of Sources and ses

1iabilities and EEuity =55B :otes Payable 3 =95 Acct Payable 96 Accrued 0axes 47 Cther Accrued 1iab 455 Current 1iab 3 855 1ong-0erm !ebt 8<5 )hareholders* EEuity Com )toc# (34 par) =55 Add Pd in Capital B=9 >etained Earnings =45 0otal EEuity 3 4,4<9 =557 3 =98 96 47 455 3 858 68< =55 B=9 48B 45D7 =,566 2;);' ' ---:;A ) --) :;A

3 3

!"#s $etermination of Sources and ses

1iabilities and EEuity =55B :otes Payable 3 =95 Acct Payable 96 Accrued 0axes 47 Cther Accrued 1iab 455 Current 1iab 3 855 1ong-0erm !ebt 8<5 )hareholders* EEuity Com )toc# (34 par) =55 Add Pd in Capital B=9 >etained Earnings =45 0otal EEuity 3 4,4<9 =557 3 =98 96 47 455 3 858 68< =55 B=9 48B 45D7 =,566 2;- );' 3 8 ' ---:;A BB ) --) :;A

8<

10

3 3

%!asic& Sources and ses Statement

)C'>CE) ?ncrease, >etained Earnings !ecrease, Accounts >ecei&able ?ncrease, 1ong-0erm !ebt !ecrease, Cash 2 Cash EEui&alents ')E) ?ncrease, ?n&entories ?ncrease, Accum 0ax Prepay !ecrease, :otes Payable ?ncrease, :et Fixed Assets 3 8< 47 BB 45 3487 3D5 4 8 B5 3487

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Analy'ing the Sources and ses Statement )ources

Primarily through net profit from operations and long-term debt increases

'ses
Primarily through an increase in in&entories and expenditures on capital assets

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Flow of Funds Statement

Fas been replaced by the cash flow statement (49D9) in ' ) audited annual reports

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"hy ()amine the Flow of Funds Statement * (S+,-./

,hy should we bother to understand a Flow of Funds )tatement that is no longer reEuired to appear in ' ) audited annual reports/

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"hy ()amine the Flow of Funds Statement

+he Flow of Funds Statement:

?ncludes important noncash transactions while the cash flow statement does not ?s easy to prepare and often preferred by managers for analysis purposes o&er the more complex cash flow statement Felps you to better understand the cash flow statement, especially if it is prepared under the -indirect method .

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Statement of Cash Flows

A summary of a firm*s payments during a period of time
0his statement reports cash inflows and outflows based on the firm*s operating acti&ities, acti&ities in&esting acti&ities, acti&ities and financing acti&ities

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Statement of Cash Flows

Cash Flow from Cperating Acti&ities )hows impact of transactions not defined as in&esting or financing acti&ities

0hese cash flows are generally the cash effects of transactions that enter into the determination of net income

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Cash Flow From -perating Activities

Cash ?nflows From sales of goods or ser&ices From interest and di&idend income Cash Cutflows 0o pay suppliers for in&entory 0o pay employees for ser&ices 0o pay lenders (interest) 0o pay go&ernment for taxes 0o pay other suppliers for other operating expenses

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Statement of Cash Flows

Cash Flow from ?n&esting Acti&ities )hows impact of buying and selling fixed assets and debt or eEuity securities of other entities Cash Flow from Financing Acti&ities
)hows impact of all cash transactions with shareholders and the borrowing and repaying transactions with lenders

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Cash Flow From ,nvesting Activities

Cash ?nflows From sale of fixed assets (property, plant, eEuipment) From sale of debt or eEuity securities (other than common eEuity) of other entities Cash Cutflows 0o acEuire fixed assets (property, plant, eEuipment) 0o purchase debt or eEuity securities (other than common eEuity) of other entities

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Cash Flow From Financing Activities

Cash ?nflows From borrowing From the sale of the firm*s own eEuity securities Cash Cutflows 0o repay amounts borrowed 0o repurchase the firm*s own eEuity securities 0o pay shareholders di&idends

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Cash Flow Forecasting

A Cash Gudget is a forecast of a firm*s future cash flows arising from collections and disbursements, usually on a monthly basis

0he financial manager is better able toA to

!etermine the future cash needs of the firm Plan for the financing of these needs Exercise control o&er cash and liEuidity of the firm

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+he Sales Forecast

,nternal Sales Forecast

)ales representati&es pro$ect sales for the period in Euestion (sales under their control or management) )ales pro$ections are screened and consolidated for product lines Product line sales pro$ections are consolidated into a single forecast

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+he Sales Forecast

()ternal Sales Forecast

Economists pro$ect o&erall economic and business trends that will affect the firm Expected mar#et share is pro$ected for current and new product lines Product line sales pro$ections are consolidated into a single forecast

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!"#s Cash Flow Forecast

1isa Hiller has finali%ed a cash flow forecast for the first six months of =55D 1isa is expecting 95I of monthly sales will be credit sales with D5I of credit sales collected in <5 days, =5I in 75 days, and no -bad debts . FintA 0he cash flow forecast will be used in forecasting the financial statements later in this chapter

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Collections and -ther Cash 0eceipts 1+housands2

)A1E) Credit )ales, 95I Cash )ales, 45I 0otal )ales, 455I CA)F CC11EC0?C:) Cash sales, current D5I of last month*s credit sales =5I of =-month-old credit sales 0otal sales receipts :CJ 349< =4 3=46 !EC 3=4= =6 3=<7 KA: 3486 4B 34B4 3 4B 479 <9 3==8 FEG 34<8 48 3485 3 48 4=< 6= 34D5

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Collections and -ther Cash 0eceipts 1+housands2

)A1E) Credit )ales, 95I Cash )ales, 45I 0otal )ales, 455I CA)F CC11EC0?C:) Cash sales, current D5I of last month*s credit sales =5I of =-month-old credit sales 0otal sales receipts HA> 3=87 =D 3=D6 3 =D 45D <4 347B AP> 3=58 =< 3==D 3 =< =58 =B 3=88 HAL 3475 4D 34BD 3 4D 476 84 3=<< K': 3495 =4 3=44 3 =4 4=D 64 3495

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Schedule of Pro3ected Cash $isbursements 1+housands2

Purchases !EC 3 <9 KA: 3 <8 FEG 3 76

CA)F !?)G'>)EHE:0) FC> P'>CFA)E) A:! CPE>A0?:M ENPE:)E) 3 <9 95 <6 347< 3 <8 96 <6 347<

455I of last month*s purchases ,ages paid Cther expenses paid 0otal disbursements (purchases and operating expenses) 28

Schedule of Pro3ected Cash $isbursements 1+housands2

Purchases
CA)F !?)G'>)EHE:0) FC> P'>CFA)E) A:! CPE>A0?:M ENPE:)E)

HA> 3 8<

AP> 3 65

HAL 3 6D

K': 3 85

455I of last month*s purchases ,ages paid Cther expenses paid 0otal disbursements
(purchases and operating expenses)

3 76 444 <6 3=59

3 8< 45B <6 3496

3 65 9= <6 3477

3 6D 9= <6 34B6

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Schedule of .et Cash $isbursements 1+housands2

KA: 0otal disbursements for purchases and operating expenses Capital expenditures !i&idend payments ?ncome taxes 0otal cash disbursements 347< FEG 347< HA> 3=59

B5 5 =8 3=8D

65 5 5 3=5<

5 9 5 3=4D

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Schedule of .et Cash $isbursements 1+housands2

AP> 0otal disbursements for purchases and operating expenses Capital expenditures !i&idend payments ?ncome taxes 0otal cash disbursements 3496 HAL 3477 K': 34B6

5 5 =8 3=49

5 5 5 3477

5 45 5 34D6

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Pro3ected .et Cash Flows and Cash !alances

Geginning cash balance 0otal cash receipts 0otal cash disbursements :et cash flow KA: 3 95 ==8 =8D 3( <<) FEG 3 8B HA> 3 <6

4D5 47B =5< =4D 3( =<) 3( 84) 3 <6 3( 4B)

Ending cash balance without additional financing 3 8B

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Pro3ected .et Cash Flows and Cash !alances

Geginning cash balance 0otal cash receipts 0otal cash disbursements :et cash flow AP> 3( 4B) =88 =49 3 <7 HAL 3 49 =<< 477 3 7B 3 D7 K': 3 D7 495 4D6 3 7 3 9=

Ending cash balance without additional financing 3 49

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