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Short-term,
Short-term,highly
highlyliquid
liquidinvestments.
investments.
Readily
Readilyconvertible
convertibleinto
intocash.
cash.
So
Sonear
nearmaturity
maturitythat
thatmarket
marketvalue
valueis
isunaffected
unaffectedby
byinterest
interestrate
ratechanges.
changes.
Why cash flow analysis?
Cash flow is not the same thing as
profit, at least, for two reasons:
First, profit, as measured by an accountant,
is based on accrual concept.
Second, for computing profit, expenditures
are arbitrarily divided into revenue and
capital expenditures.
Purpose of the Statement of
Cash Flows
Provides information about the cash receipts and
cash payments of a business entity during the
accounting period.
Helps investors with questions about the
company’s:
Ability to generate positive cash flows.
Ability to meet its obligations and to pay
dividends.
Need for external financing.
Investing and financing transactions for the
period.
Sources and Uses of Funds and
Cash Flows
Sources of funds or cash flows:
funds from operations
sale of fixed assets
issue of share capital
borrowings
Uses of funds are:
losses
purchase of fixed assets
repayment of borrowings
payment of dividends
Cash from Operations
Cash flow from operations
+ PAT (– loss)
+ Depreciation
+ Other non-cash expenses
– Non-cash incomes
+ Loss from the sale of fixed assets
– Gain from the sale of fixed assets
+ Decreases in net working capital
– Increases in net working capital
Cash Flow Analysis
Operating Activity:
Operating activities are the principal
revenue-producing activities that are
not investing or financing activities.
Enterprises should represent cash flow
from operating activities using either
direct method or indirect method.
Investing Activities: