CASH FLOW Statement and its ANALYSIS

Presented By :-Name Div Roll NoGufran Siddiqui A 53

Aabid Kalokhe a 20

Shehzad Khan A 30

Asif valsangkar a 61

Farhan Ansari a 04

Shoaib shaikh a 50

Zeeshan azmi a 06

Statement of Cash Flows

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

Importance of Cash Flow

Accrual-based accounting requires reporting revenues when earned and expenses when incurred – not when cash is exchanged.

Explains the reasons for a change in cash.

Reconciles net income with cash flow from operations.

Valuation models used in financial analysis are often based on projections of future cash flows.

Preparing Cash Flow Statement

Four parts of a statement of cash flows:

Cash

Operating Activities

Investing Activities

Financing Activities

Cash

Cash includes Cash and Cash-equivalents Cash Equivalents• Treasury bills maturing within 90 days or

less.• Investment Funds• Foreign Currency on hand• Checking Account• Free Savings Account

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

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.

How Cash Flows During an Accounting Period

Total Inflows less Total Outflows = Change in cash for the accounting period

InflowsOperating Activities

Outflows

Investing Activities

Financing Activities

Components of the Cash Flow Statement

Cash received fromsale of goodsand services

Cash received fromsale of goodsand services

Cash paid foroperating goods

and services

Cash paid foroperating goods

and services

cash flowfrom operations

cash flowfrom operationsOperations - =

Cash received fromsales of investmentsand longterm assets

Cash received fromsales of investmentsand longterm assets

Cash paid to purchaselong-term investments

Cash paid to purchaselong-term investments

cash flowfrom investing

cash flowfrom investingInvesting - =

Cash received fromissue of debt or

capital stock

Cash received fromissue of debt or

capital stock

Cash paid for dividends and to

repay debt or to buy treasury stock

Cash paid for dividends and to

repay debt or to buy treasury stock

cash flowfrom financing

cash flowfrom financingFinancing - =

Net change in cashfor the period

Net change in cashfor the period

=

+ or -

+ or -

cash inflows cash outflows

Calculating Cash Flow from Operating Activities

Firms may use one of two methods

prescribed by the IASB-FASB: Direct Method Indirect Method

The two methods yield identical figures for net cash flow from operating activities because the underlying accounting concepts are the same.

Direct Method

Direct Method Shows

Cash collections from customers

Interest and dividends collected

Other operating cash receipts

Cash paid to suppliers and employees

Interest paid

Taxes paid

Other operating cash payments

Under Direct Method, Income Statement items are converted to

cash Flows individually

Cash Flow from Operating Activities : Direct Method

Cash Flow from Operating Activities Amount(Rs.)

Cash Receipts from :SalesCommission & FeesInterest Received

Cash Payment for :PurchasesPayments to and for employeesOperating ExpensesInterest PaymentsDirect Taxes Paid

Net Cash Flow from Operating Activities

XXX

XXX

XXX

Amount(Rs.)

XXXXXXXXX

XXXXXXXXXXXXXXX

Indirect Method

Indirect Method starts with Net Income and adjusts for

Deferrals

Accruals

Non-cash items, such as depreciation and amortization

Non-operating items, such as gains and losses on asset sales

Net 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

Cash Flow from Operating Activities : Indirect Method

Cash Flow from Operating Activities Amount(Rs.)

Amount(Rs.)

Net Profit before TaxAdjustment for : Depreciation Loss on Sale of Fixed Assets Loss on revaluationOperating Profit before Working Capital Changes

Adjustment* for :Trade and other ReceivablesInventories or StocksTrade Payments or (Creditors and B/P)Cash Generated from OperationsInterest PaidTaxes PaidNet Cash Flow from Operating Activities

xxxxxxxxx

xxx

xxx

xxxxxx

xxxxxx

xxx

xxxxxxxxx

XXX

Preparing a Statement of Cash Flows

Look at changes in balance sheet accounts from beginning to end of accounting period

Next Step:Transfer the account changes to the appropriate

area of a statement of cash flows

First Step

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

Limitations Of cash flow analysis

Non-Cash Transactions are ignored.

Not a Substitute for Income Statementt.

Not a test of Total Financial Position.

Historical in Nature.

Analysis of the Cash Flow statement

Should, at a minimum cover the following

areas:

Cash flow from operating activities

Cash inflows

Cash outflows

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

Example of change in cash based on business activities for companies in different industries

Operating Investing Financing Change Activities Activities Activities in CashAirline $ 2,29 ( 1,210) 213 1,232

Computer (25) 118 1 94

Recreation 42 (26) (5) 11

Retailer 1,068 332 (53) 1,347

Semiconductor 14,823 (6,362) (9,544) (1,083)

*Data from SEC website, www.sec.gov