CORPORATE FINANCE

Program MBA- Professional (Sec-A) 4th Semester

Submitted to
Ch. Abdul Khaliq

Submitted by
Zeeshan Tufail (9656)

Superior University Lahore

 Statement of Submission

I completed their task of final project of Corporate Finance at

Superior University Lahore to fulfill the partial requirement of
the Semester of MBA-A 4th Semester.

Acknowledgement
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We bow our head to Almighty Allah, the Omnipotent, the
Merciful, who endeavor our services towards his manuscript. All
praises to Almighty Allah who gave us the courage and patience
for completion of this work. All the respects are for Holy
Prophet Muhammad (Peace Be upon Him) who se moral and
spiritual teachings enlightened our hearts.
We feel how weak and deficit in vocabulary to find suitable
words that would fully convey the sense of immense
indebtedness and deep gratitude that we owe to our teacher, Sir
Ch. Abdul Khaliq for his endless propitious guidance,
illustration advice, keen interest, value able comments and
encouragement throughout the course of studies and
completion of this work.

Statement of Cash Flow

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Definition

Cash Flow Statement can be defined as “A financial statement that reflects the inflow
of revenue vs. the outflow of expenses resulting from operating, investing and
financing activities during a specific time period.”

Explanation

The statement of cash flows is one of the main financial statements. (The other financial
statements are the balance sheet, income statement, and statement of stockholders'
equity). Cash flow statements and projections express a business's results or plans in terms
of cash in and out of the business, without adjusting for accrued revenues and expenses.
The cash flow statement doesn't show whether the business will be profitable, but it does
show the cash position of the business at any given point in time by measuring revenue
against outlays.

The cash flow statement should be prepared on a monthly basis during the first year, on a
quarterly basis for the second year, and annually for the third year.

Categories of Cash Flow

The cash flow statement organizes and reports the cash generated and used in the
following categories:

1. Operating – Converts the items reported on the income statement from the
activities accrual basis of accounting to cash.
2. Investing – Reports the purchase and sale of long-term investments and property,
activities plant and equipment.
3. Financing – Reports the issuance and repurchase of the company's own bonds
activities and stock and the payment of dividends.

1. Cash Flow from Operations

This is the key source of a company's cash generation. It is the cash that the
company produces internally as opposed to funds coming from outside investing and
financing activities. In this section of the cash flow statement, net income (income
statement) is adjusted for non-cash charges and the increases and decreases to working
capital items - operating assets and liabilities in the balance sheet's current position.

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 Step A: Start with Net Income:

Step B: Add back to (decreases in non-cash current assets & Inc. in current
liabilities):
Depreciation and/or amortization expense

Decrease in accounts receivable

Decrease in inventories

Decrease in prepaid

Increase in accounts payable (or other liabilities)

Loss on disposal of assets, etc.

Step C: Subtract from net income (increases in non-cash current assets &
decreases in non-cash current liabilities):
Increase in accounts receivable

Increase in inventories

Increase in prepaid

Decrease in accounts payable

Gains on disposal of assets, etc.

= Net cash flow from Operating Activities

2. Cash Flow from Investing

For the most part, investing transactions generate cash outflows, such as capital
expenditures for plant, property and equipment, business acquisitions and the purchase of
investment securities. Inflows come from the sale of assets, businesses and investment
securities. For investors, the most important item in this category is capital expenditures
(more on this later). It's generally assumed that this use of cash is a prime necessity for
ensuring the proper maintenance of, and additions to, a company's physical assets to
support its efficient operation and competitiveness.

Investing Activities (tends to look at the longer-term assets) include:

Cash inflow

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 1. Proceeds/receipts from sale of assets.
2. Capital expenditures.
3. Collection of principal on loans to others.

Cash outflow
1. Buying/payments of/for fixed assets.

3. Cash Flow from Financing

Debt and equity transactions dominate this category. Companies continuously borrow and
repay debt. The issuance of stock is much less frequent. Here again, for investors,
particularly income investors, the most important item is cash dividends paid. Its cash, not
profits, that is used to pay dividends to shareholders.

Financing Activities (tends to look at the longer-term liabilities, capital accts and
retained earnings) include:

Cash inflow
1. Proceeds from loans, bonds, or issuance of common stock.

Cash outflow
1. Dividends paid.
2. Repayment of loans, bonds, or purchase of treasury stock.

Non-cash investing/financing activities that require disclosure:

Examples include acquisition of fixed assets by bond or stock issuance – no cash was
currently used, but will be in the future. Stock dividends are not disclosed.

Methods of Cash Flow

There are two methods to prepare the Cash flow Statement.

1. Indirect Method

The indirect method (or reconciliation method) starts with net income and converts it to
net cash flow from operating activities. In other words, the indirect method adjusts net
income for items that affected reported net income but did not affect cash. To compute net
cash flow from operating activities, non-cash charges in the income statement are added
ask to net income and non-cash credits are deducted.

2. Direct Method

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Under the direct method the statement of cash flows reports net cash flow from operating
activities as major classes of operating cash receipts (e.g., cash collected from customers
and cash received from interest and dividends) and cash disbursements (e.g., cash paid to
suppliers for goods, to employees for services, to creditors for interest, and to government
authorities for taxes).

Example Statement of Cash Flows

Shiner Corporation continues to do well and has added a line of products to its operations.
Thus, a new asset, and inventories appear on the balance sheet this period. The following
transactions are noted for the year. Operating expenses on the income statement include
depreciation expense of $33,000 and amortization of prepaid expenses of $2,000. Shiner
sold the land at its book value and $55,000 in cash dividends were paid. Interest expense of
$12,000 was paid in cash and additional equipment was purchased for $166,000.
Equipment that cost $41,000, having a book value of $36,000, was sold for $34,000. The
bonds were redeemed at their book value for cash and common stock ($1) was issued.

Comparative Balance Sheet

Shiner Corporation

Dec 31, Dec 31,

Assets 1996 1995

Cash $54,000 $37,000

Accounts Receivable $68,000 $26,000

Inventories $54,000 $0

Prepaid Expenses $4,000 $6,000

Land $45,000 $70,000

Building $200,000

Accumulated Depreciation $21,000 $179,000 *$189,000

Equipment $193,000

Accumulated Depreciation $28,000 $165,000 *$58,000

Total Assets $569,000 $386,000

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 Liabilities and Stockholder Equity

Accounts Payable $33,000 $40,000

Bonds Payable $110,000 $150,000

Common Stock $220,000 $60,000

Retained Earnings $206,000 $136,000

Total Liabilities and Stockholder

$569,000 $386,000
Equity

Income Statement

Shiner Corporation

Step 1: Change in Cash:  Dec 31, 96 Balance minus Dec 31, 95 balance ($54,000-$37,000)=$17,000
Revenue $890,000
Step 2: Net Cash flow from Operating Activities
Cost of goods sold $465,000
Direct Method:
Operating Expenses $221,000
Cash collected from Revenues $848,000
Interest Expense $12,000
Cash payments for Expenses $712,000
Loss on Equipment
Interest Expense $2,000 $700,000
$12,000
sale
Income before Income Taxes $136,000
Income before Income Taxes $190,000
Income Taxes Income Tax Expense $65,000
$65,000
Net cash flow from OperatingNet
Activities
Income $59,000
$125,000
Comments: The $848,000 was derived by subtracting the change in
Accts Receivable from Revenues for the period. The cash payments
for expenses was derived by adding the actual cash expended on
inventory ($465,000 + 54,000) plus operating expenses adjusted for
the change in accounts payable (+7,000), prepaid expenses (-2,000),
and reduced by the included depreciation expense ($33,000).

Indirect Method:

Net Income $125,000

Adjustments to reconcile net income to net cash

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Accts Receivable decrease ($42,000)

Prepaid Expense decrease $2,000

Inventory increase ($54,000)

Accts Payable decrease ($7,000)

Loss on Equipment Sale $2,000

Depreciation $33,000 ($66,000

Net cash flow from Operating Activities $59,000

Statement of Cash Flows

Cash Flow from Operating Activities

Step 3: Investing Activities
Net Income $125,000
Land Sale $25,000
Adjustments to reconcile net income to net cash
Equipment Sale $34,000
Accts Receivable decrease ($42,000)
Equipment Purchase ($166,000)
Prepaid Expense decrease $2,000
Financing Activities
Inventory increase ($54,000)
Issuance of Common Stock $160,000
Accts Payable decrease ($7,000)
Redemption of Bonds Payable ($40,000)
Loss on Equipment Sale $2,000
Dividend payment to shareholders ($55,000)
Depreciation $33,000 ($66,000)
Net cash provided from Operating Activities $59,000
Investing Activities

Land Sale $25,000

Equipment Sale $34,000

Equipment Purchase ($166,000) ($107,000)

Financing Activities

Issuance of Common Stock $160,000

Redemption of Bonds Payable ($40,000)

Dividend payment to shareholders ($55,000) $65,000

Net Decrease in Cash $17,000

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Cash Jan 1, 1996 $37,000

Cash Dec 31, 1996 $54,000

Sources

http://www.investopedia.com/articles/stocks/07/easycashflow.asp

http://www.entrepreneur.com/encyclopedia/term/82038.html

http://www.uic.edu/classes/actg/actg500/cfexample3.html

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