Statement of Cash Flow

Cash Flow Statement

 Flow statement
 Periodic
 Provides information regarding the liquidity of a firm
 Explains the reasons for increase or decrease in cash balance
from one balance sheet date to the next
 Classifies the reasons for the change as an operating, investing
or financing activity.
 Amount of net income in a period is usually different than the
amount of increase in cash in the same period
 Reconciles net income with cash flow from operations.
 Relationship with BS and IS
Income statement

BS at start Cash flow BS at end

A cash flow statement reflects both “profit related” and

“non-profit related” activities (investing and financing) with
an impact on available cash over the period covered in the
income statement
 Classification of Cash Flows

Operations -- cash flows related to selling goods and services;

that is, the principle business of the firm.
Investing -- cash flows related to the acquisition or sale of
noncurrent assets.
Financing -- long term and short term cash flows related to
liabilities and owners’ equity; dividends are a financing
cash outflow.
What is Cash?
 Cash includes cash and cash equivalents
 Cash equivalents:
 treasury bills maturing in 90 days or less;
 investment funds;
 foreign currency on hand;
 checking account and free savings account
External Uses of CFS
 To assess the ability of a firm to manage cash
flows
 To assess the ability of a firm to generate cash
through its operations
 To assess the company’s ability to meet its
obligations and its dividend policy
 To provide information about the effectiveness of
the firm to convert its revenues to cash
 To provide information to estimate or anticipate the
company’s need for additional financing
Internal Uses of CFS
 Along side with cash budget CFS is used:
 To assess liquidity
○ Determine if short-term financing is necessary

 To determine dividend policy

○ Decide to distribute; or increase or decrease

 To evaluate the investment and financing

decisions
Cash flow from operating activities

 cash received from customers through sale of goods

or services performed;
 cash received from non-operating activities such as
dividends from investments, interest revenue,
commissions, and fees;
 cash payments to suppliers or employees;
 cash payments for taxes and other expenses;
Investing Activities
Examples of investing activities include:
 cash payments to acquire property, plant, and
equipment (PPE), other tangible or intangible
assets, and other long-term assets; and sale of
such assets
 loans extended to other companies; and
collection of such loans;
Financing Activities
Examples of financing activities are :
 cash received from issuing share capital;
 cash proceeds from issuing bonds, loans, notes,
mortgages and other short or long-term
borrowings;
 cash repayment of loans and other borrowings;
and
 cash payments to shareholders as dividends.
 Classification of Cash in-flows and outflows
From sales of goods To wages salary
payments
and services to
customers To suppliers for
purchases of inventories
From receipt of Operating Activities To other operating
customer advances expenses
From receipt of To interest payments
interest revenue or To tax payments
dividends or rent To advance payments to
revenue or similar suppliers
revenue items

From sale of PPE and To purchase PPE and

other long-term assets other long-term assets
Investing Activities
From collection of loans To make loans and to
collect such loans

From sale of common

or preferred stock Financing Activities To repay debt
From issuance of To pay dividends
short or long term
debt
Two Formats to Prepare

 Indirect method reconciles from net

income to net cash provided by operating activities
 Direct method reports all cash receipts and
cash payments from operating activities
 The two methods have no effect on investing or
financing activities.

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Two Formats for
Operating Activities
Indirect Method
Net income $XXX
Adjustments:
Depreciation, etc. XXX
Net income provided by operating activities $XXX
Direct Method
Collection from customers $XXX
Deductions:
Payment to suppliers, etc. XXX
Net income provided by operating activities $XXX
Thank You