CASH FLOW Statement and its ANALYSIS

ByAsHra ReHmat

CASH FLOW Statement

• Provides information about cash inflows and outflows during an accounting period

• Is developed from Balance Sheet and Income Statement data

• Important as an analytical tool

OperationsCash received and paidfor day-to-day activities

with customers, suppliers,

and employees.

InvestingCash paid and received

from buying and selling

long-term assets.

FinancingCash received and paid

for exchanges withlenders and

stockholders.

Business Activities and Cash FlowsThe Statement of Cash Flows focuses attention

on:

Operating Activities

• Cash flows related to selling goods and services; that is, the principle business of the firm.

• The cash effects of transactions and other events that enter into the determination of income

Examples of Operating Activities• Cash received from customers through sale of goods or

services performed;• Cash payments to suppliers or employees• Cash payments for taxes and other expenses

Direct and Indirect Reportingof Operating Cash Flows

We will concentrate on the indirect method for now, and wewill look at the direct method again later in the chapter.

Same result

Investing Activities• Acquiring/disposing of securities that are not cash equivalents

• Cash flows related to the acquisition or sale of non-current assets.

• Lending money/collecting on loans

Examples of Investing Activities

Cash received from sales of assets that are not held for the regular trading purposes such as sale of building; marketable securities such as trading and available for sale securities, and investments

Cash payments to acquire property, plant, and equipment (PPE), other tangible or intangible assets, and other long-term assets

Cash received from sale of, and paid for purchases of derivative instruments

Loans extended to other companies and collection of such loans

Financing Activities

• Borrowing from creditors/repaying the principal

• Obtaining resources from owners

• Providing owners with a return on investment

Examples of financing activities Cash received from issuing share capital Cash proceeds from issuing bonds, loans, notes, mortgages and other short

or long-term borrowings

Cash payments to shareholders to redeem existing shares- treasury stock• Cash repayment of loans and other borrowings; and• Cash payments to shareholders as dividends.

Uses Of cash flow analysis

External Uses

• 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

(contd)….

Internal uses

• Along side with cash budget Cash Flow Statement 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

Why cash flow Analysis ???

• Its an important analytical tool for creditors, investors and other users of financial statement data.

Firm’s ability to generate cash flows in the future

Firm’s capacity to meet cash obligations

Firm’s future external financing needs

Firm’s success in productively managing investing activities

Firm’s effectiveness in implementing financing and investing strategies

Analysis of Cash Inflows

Generating cash from operations is the preferred method for obtaining excess cash to finance:

• Capital expenditures and expansion

• Repayment of debt

• Payment of dividends

Analysis of Cash Outflows

When analyzing the cash outflows, the analyst should consider the necessity of the outflow and how the outflow was financed

Generally, it is best to finance short-term assets with short-term debt and long-term assets with long-term debt or issuance of stock

THANK YOU!