cash flow statement [compatibility mode]

7-1

Cash Flow Management

Dr.Hiren Maniar

7-2

Cash Flow

Cash is KingLife blood of businessCash flow related financial reports are

most important (even more important than Income Statement)

Understand cash versus accrual

7-3

Cash Flow

Business

Cash In

Customers

Products / Services

Cash out

PayrollInventoryUtilitiesRentTaxesInterestsLoansEtc.

Equity and/or Debt financing

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Cash Flows

Cash Outflows Cash InflowsInitial Investment Incremental RevenueWorking Capital Inv. Cost SavingsRepairs & Maint. Allowed Tax CreditsInc. Man. & Op Costs Salvage ValueInterest and Loan Pmt Working Cap ReleaseIncome Taxes ST & LT Loans

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0 1 2 3 N

Cash Flow Elements

Borrowed Funds

Investment in Assetsand Working Capital

Operating Cash Inflows

Operating Cash Outflows

Loan Repayment

Salvage Value

Recovery of Working Capital

Net cash flow = Cash inflow - cash outflow

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The Cash Flow Cycle

OrderGoods

Day 1

ReceiveGoods

15

PayInvoice

40

14 25

218

178

SellGoods*

DeliverGoods

221

3

CustomerPays**

SendInvoice

230

9

280

50

Cash Flow Cycle = 240 days

* Based on Average Inventory Turnover:

365 days = 178 days2.05 times/year

** Based on Average Collection Period:

365 days = 50 days7.31 times/year

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Cash Flow Definitions

Operating Cash FlowEBITDA = EBIT + Dep/Amort

or, EBIT(1 t) + Dep/Amort

Free Cash Flow = EBIT(1 t) + Dep/Amort - Change in NWC - Capital Spending

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Free Cash Flow

Dividends are the cash flows actually paid tostockholders. Free cash flows are the cash flowsavailable for distribution.

Free Cash Flow (FCF) is the amount of cash flowavailable to debt and equity holders after meeting alloperating needs and paying for its net fixed assetinvestments (NFAI) and net current asset investments(NCAI).

FCF = OCF NFAI - NCAI

NFAI = Change in net fixed assets + Depreciation

NCAI = Change in CA Change in A/P and Accruals

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Profitability and cash flow

When Cash In is consistently larger than Cash out= Profitable and sustainable business

If and when Cash goes out faster than Cash gets In, business could bankrupt even when profitable

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Reasons for Cash Flow Problems

Difficulty in collecting receivablesSeasonality of salesUnexpected variation in sales Policies on how payments are made to

suppliers)Large expenditures up front for customer

projects Capital projects Ineffective inventory management

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Cash Flow Management

Assure cash is available when neededManage timing of cash in and cash out

Manage working capital

Minimize expenditures

Know how business get and uses its cash

Know how growth affects cash needs

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Purposes of the Cash Flow Statement

The cash flow statement is designed to fulfill the following:

Predict future cash flows

Determine the ability to pay dividends plus interest and principal

Show the relationship of net income to cash flow

How much cash was generated by operating activities?

What were the new financing activities during the period?

How much of new financing was internally generated or was from new debt or equity?

How was debt financed and paid?

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Let us understand Cash Flow Statement with example

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Sources and Uses StatementSources and Uses Statement

The letters labeling the boxes stand for Uses, Sources,Assets, and Liabilities (broadly defined). The pluses (minuses) indicate increases (decreases) in assets or liabilities.

The letters labeling the boxes stand for Uses, Sources,Assets, and Liabilities (broadly defined). The pluses (minuses) indicate increases (decreases) in assets or liabilities.

A L- ++ -

SU

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Sources / Uses of Cash

SOURCESProfitable operationsSales of fixed assetsLong-term borrowing Issues of sharesDecrease in working

capital

USESLoss-making operationsPurchase of fixed

assets

Repayment of loansPayment of dividends Increase in working

capital

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BWs Determination of Sources and UsesBWs Determination of Sources and Uses

$ 100 - S410 - S616 + U

5 --9 + U

$ 1,140 N/A930 N/A (299) N/A

$ 631 + U50 --

223 --$ 2,044

$ 100 - S410 - S616 + U

5 --9 + U

$ 1,140 N/A930 N/A (299) N/A

$ 631 + U50 --

223 --$ 2,044

Cash and C.E. $ 90 Acct. Rec. 394 Inventories 696 Prepaid Exp 5 Accum Tax Prepay 10

Current Assets $ 1,195 Fixed Assets (@Cost) 1030 Less: Acc. Depr. (329)

Net Fix. Assets $ 701 Investment, LT 50 Other Assets, LT 223

Total Assets $ 2,169

Assets 2007 2006 +/- S/U

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$ 100 $10 S410 16 S616 80 U

5 --9 1 U

$ 1,140 N/A930 N/A (299) N/A

$ 631 70 U50 --

223 --$ 2,044

$ 100 $10 S410 16 S616 80 U

5 --9 1 U

$ 1,140 N/A930 N/A (299) N/A

$ 631 70 U50 --

223 --$ 2,044

Cash and C.E. $ 90 Acct. Rec. 394 Inventories 696 Prepaid Exp 5 Accum Tax Prepay 10

Current Assets $ 1,195 Fixed Assets (@Cost) 1030 Less: Acc. Depr. (329)


Total Assets $ 2,169

Assets 2007 2006 +/- S/U

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$ 295 - U94 --16 --

100 --$ 505 N/A

453 + S

200 --729 --157 + S

$ 1086 N/A$ 2,044

$ 295 - U94 --16 --

100 --$ 505 N/A

453 + S

200 --729 --157 + S

$ 1086 N/A$ 2,044

Notes Payable $ 290 Acct. Payable 94 Accrued Taxes 16 Other Accrued Liab. 100

Current Liab. $ 500 Long-Term Debt 530 Shareholders EquityCom. Stock ($1 par) 200Add Pd in Capital 729 Retained Earnings 210

Total Equity $ 1,139Total Liab/Equity $ 2,169

Liabilities and Equity 2007 2006 +/- S/U

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$ 295 $ 5 U94 --16 --

100 --$ 505 N/A

453 77 S

200 --729 --157 53 S

$ 1086 N/A$ 2,044

$ 295 $ 5 U94 --16 --

100 --$ 505 N/A

453 77 S

200 --729 --157 53 S

$ 1086 N/A$ 2,044

Notes Payable $ 290 Acct. Payable 94 Accrued Taxes 16 Other Accrued Liab. 100

Current Liab. $ 500 Long-Term Debt 530 Shareholders EquityCom. Stock ($1 par) 200Add Pd in Capital 729 Retained Earnings 210

Total Equity $ 1,139Total Liab/Equity $ 2,169

Liabilities and Equity 2007 2006 +/- S/U

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USES $156Increase, Inventories (S-15) $80Increase, Accum Tax Prepay (S-15) 1Decrease, Notes Payable (S-17) 5Increase, Net Fixed Assets (S-15) 70

$156

USES $156Increase, Inventories (S-15) $80Increase, Accum Tax Prepay (S-15) 1Decrease, Notes Payable (S-17) 5Increase, Net Fixed Assets (S-15) 70

$156

SOURCESIncrease, Retained Earnings (S-17) $ 53Decrease, Accounts Receivable (S-15) 16Increase, Long-Term Debt (S-17) 77Decrease, Cash + Cash Equivalents (S-15) 10

Basic Sources and Uses StatementBasic Sources and Uses Statement

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Adjusting the Basic Sources and Uses StatementAdjusting the Basic Sources and Uses Statement

The following three slides are Basket Wonders Balance Sheet

and Income StatementThis information will be needed to adjust the basic Sources

and Uses Statement.

The following three slides are Basket Wonders Balance Sheet

and Income StatementThis information will be needed to adjust the basic Sources

and Uses Statement.

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Basket Wonders Balance Sheet (Asset Side) refer (S-15)Basket Wonders Balance Sheet (Asset Side) refer (S-15)

a. How the firm stands on a specific date.

b. What BW owned.c. Amounts owed by

customers.d. Future expense items

already paid.e. Cash/likely convertible

to cash within 1 year.f. Original amount paid.g. Acc. deductions for

wear and tear.

a. How the firm stands on a specific date.

b. What BW owned.c. Amounts owed by

customers.d. Future expense items

already paid.e. Cash/likely convertible

to cash within 1 year.f. Original amount paid.g. Acc. deductions for

wear and tear.

Cash and C.E. $ 90 Acct. Rec.c 394 Inventories 696 Prepaid Exp d 5 Accum Tax Prepay 10

Current Assetse $1,195 Fixed Assets (@Cost)f 1030 Less: Acc. Depr. g (329)


Total Assetsb $2,169

Basket Wonders Balance Sheet (thousands) Dec. 31, 2007

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Basket Wonders Balance Sheet (Liability Side) refer (S-16)Basket Wonders Balance Sheet (Liability Side) refer (S-16)

a. Note, Assets = Liabilities + Equity.

b. What BW owed and ownership position.

c. Owed to suppliers for goods and services.

d. Unpaid wages, salaries, etc.

e. Debts payable < 1 year.f. Debts payable > 1 year.g. Original investment. h. Earnings reinvested.

a. Note, Assets = Liabilities + Equity.

b. What BW owed and ownership position.

c. Owed to suppliers for goods and services.

d. Unpaid wages, salaries, etc.

e. Debts payable < 1 year.f. Debts payable > 1 year.g. Original investment. h. Earnings reinvested.

Notes Payable $ 290 Acct. Payablec 94 Accrued Taxes d 16 Other Accrued Liab. d 100

Current Liab. e $ 500 Long-Term Debt f 530Shareholders EquityCom. Stock ($1 par) g 200Add Pd in Capital g 729 Retained Earnings h 210

Total Equity $1,139Total Liab/Equitya,b $2,169

Basket Wonders Balance Sheet (thousands) Dec. 31, 2007

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Basket Wonders Income StatementBasket Wonders Income Statement

a. Measures profitability over a time period.

b. Received, or receivable, from customers.

c. Sales comm., adv., officers salaries, etc.

d. Operating income.e. Cost of borrowed funds.f. Taxable income.g. Amount earned for

shareholders.

a. Measures profitability over a time period.

b. Received, or receivable, from customers.

c. Sales comm., adv., officers salaries, etc.

d. Operating income.e. Cost of borrowed funds.f. Taxable income.g. Amount earned for

shareholders.

Net Sales $ 2,211 Cost of Goods Sold b 1,599

Gross Profit $ 612 SG&A Expenses c 402

EBITd $ 210 Interest Expensee 59

EBT f $ 151Income Taxes 60

EATg $ 91 Cash Dividends 38 Increase in RE $ 53

Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2007

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Recognize Profits and DividendsChange in retained earnings is composed

of profits and dividends.

Source: Net Profit (S-22) $91Less Use: Cash Dividends (S-22) 38(Net) Source: Incr., R.E. $53

Recognize Profits and DividendsChange in retained earnings is composed

of profits and dividends.

Source: Net Profit (S-22) $91Less Use: Cash Dividends (S-22) 38(Net) Source: Incr., R.E. $53

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Recognize Depreciation and Gross Changes in Fixed Assets

Change in net fixed assets is composed of depreciation and fixed assets.

Source: Depreciation (S-14) $ 30Less Use: Add. to F.A. (S-14) 100(Net) Use: Incr., Net F.A. $ 70

Recognize Depreciation and Gross Changes in Fixed Assets

Change in net fixed assets is composed of depreciation and fixed assets.

Source: Depreciation (S-14) $ 30Less Use: Add. to F.A. (S-14) 100(Net) Use: Incr., Net F.A. $ 70

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SOURCESFunds provided by operations

Net Profit (S-22) $ 91Depreciation (S-14) 30

Decrease, Accounts Receivable (S-18) 16Increase, Long-Term Debt (S-18) 77Decrease, Cash + Cash Equivalents (S-18) 10

$224

Sources and Uses Statement (Sources Side)Sources and Uses Statement (Sources Side)

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USES

Dividends (S-22) $ 38Additions to fixed assets (S-14) 100

Increase, Inventories (S-18) 80Increase, Accum. Tax Prepay (S-18) 1Decrease, Notes Payable (S-18) 5

$224

Sources and Uses Statement (Uses Side)Sources and Uses Statement (Uses Side)

7-29

Statement of Cash FlowsStatement of Cash Flows

operating activities,investing activities, and

financing activities.

operating activities,investing activities, and

financing activities.

This statement reports cash inflowsand outflows based on the firms

A summary of a firms payments during a period of time.

7-30

Statement of Cash Flows

Cash Flow from Operating Activities

Shows impact of transactions not defined as investing or financing

activities. These cash flows are generally the cash

effects of transactions that enter into the determination of net income.

7-31

Cash Flow From Operating Activities

Cash InflowsFrom sales of goods or servicesFrom interest and dividend income

Cash OutflowsTo pay suppliers for inventoryTo pay employees for servicesTo pay lenders (interest)To pay government for taxesTo pay other suppliers for other

operating expenses

7-32

Cash Flow From Operating Activities

It would seem more logical to classify interest and dividend income as an

investing inflow, while interest paid certainly looks like a financing

outflow. But, the GAAP Standards classified these

items as operating flows.

7-33

Statement of Cash FlowsStatement of Cash Flows

Cash Flow from Financing ActivitiesShows impact of all cash transactions with shareholders and the borrowing

and repaying transactions with lenders.

Cash Flow from Financing ActivitiesShows impact of all cash transactions with shareholders and the borrowing

and repaying transactions with lenders.

Cash Flow from Investing ActivitiesShows impact of buying and selling

fixed assets and debt or equity securities of other entities.

7-34

Cash Flow From Investing Activities

Cash InflowsFrom sale of fixed assets (property, plant,

equipment)From sale of debt or equity securities (other

than common equity) of other entities

Cash OutflowsTo acquire fixed assets (property, plant,

equipment)To purchase debt or equity securities (other

than common equity) of other entities

7-35

Cash Flow From Financing Activities

Cash InflowsFrom borrowingFrom the sale of the firms own equity

securities

Cash OutflowsTo repay amounts borrowedTo repurchase the firms own equity

securitiesTo pay shareholders dividends

7-37

Determination of Cash Flows From Operating Activities

Direct MethodIncome Statement items are converted to

cash flows individually

Indirect MethodNet income or loss is adjusted for

accruals such as accounts receivable and payable, and for non-cash expenses such as depreciation reconciliation of the accrual based and cash based accounting

7-38

Comparison of Methods

Direct method of presentation calculates cash flow from operations by subtracting cash disbursements to supplies, employees, and others from cash receipts from customers.

The indirect method calculates cash flow from operations by adjusting net income for non-cash revenues and expenses.

Most firms present their cash flows using the indirect method.

Only operating activities section is different between the methods, investing and financing

sections are the same.

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Indirect Method --Statement of Cash Flows


Net Income (S-22) $ 91Depreciation (S-14) 30Decrease, accounts receivable (S-18) 16Increase, inventories (S-18) ( 80)Increase, accum. tax prepay (S-18) ( 1)

Net cash provided (used) byoperating activities $ 56

7-40


Cash Flow from Investing Activities

Additions to Fixed Assets (S-14) $(100)

Net cash provided (used) byinvesting activities $(100)

7-41


Cash Flow from Financing Activities

Increase, notes payable (S-18) $ ( 5)Increase, long-term debt (S-18) 77Dividends paid (S-22) ( 38)

Net cash provided (used) by financing activities $ 34

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Increase (decrease) in cash and cash equivalents (S-15) $ ( 10)

Cash and cash equivalents, 2006 100Cash and cash equivalents, 2007 $ 90

Supplemental cash flow disclosuresInterest paid (S-22) $ 59Taxes paid (S-22) 60

7-43

Direct Method --Statement of Cash Flows


Cash received from customersa $2,227Cash paid to suppliers and

employeesb (2,051)Interest paid ( 59)Taxes paidc ( 61)

Net cash provided (used) byoperating activities $ 56

a, b, c See Worksheet on next slide for calculation

7-44

Worksheet for Preparing Operating Activities Section

Sales (S-22) $2,211+(-) Decrease (increase) in AR (S-18) 16

Cash received from customers $2,227

COGS - Depreciation + SGA (1599-30+402)((S-22) , (S-14) , (S-22) ) $1,971

+(-) Increase (decrease) in inventory (S-18) 80Cash paid to suppliers and employees $2,051

Income taxes (federal / state) (S-22) $ 60+(-) Incr (Decr) in accum. tax prepay (S-18) 1

Taxes paid $ 61

(a)

(b)

(c)

7-45


Cash Flow from Investing Activities

Additions to Fixed Assets (S-14) $(100)

Net cash provided (used) byinvesting activities $(100)

7-46


Cash Flow from Financing Activities

Decrease, notes payable (S-18) $ ( 5)Increase, long-term debt (S-18) 77Dividends paid (S-22) ( 38)

Net cash provided (used) by financing activities $ 34

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Increase (decrease) in cash and cash equivalents $ ( 10)

Cash and cash equivalents, 2006 100Cash and cash equivalents, 2007 $ 90

Supplemental cash flow disclosuresNet Income (EAT) $ 91Depreciation 30Decrease, accounts receivable 16Increase, inventories ( 80)Increase, accum. tax prepay ( 1)Net cash provided (used) byoperating activities $ 56

7-48

WORDS OF WISDOM

Cash flow analysis is a method of worrying before you spend your

money instead of afterwards.

7-49

Thank Q

cash flow statement [compatibility mode]

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