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GROUP 5
CASH FLOW ANALYSIS
INTRODUCTION
STATEMENT OF CASH FLOW
ANALYSIS IMPLICATIONS OF CASHFLOWS
ANALYSIS OF CASH FLOWS
SPECIALISED CASH FLOW RATIOS
ANALYSTICAL CASH FLOW WORKSHEET
INTRODUCTION
OBJECTIVES
Provide users of financial statements the
INTRODUCTION
DEFINITIONS
Cash comprises of cash on hand, and demand
INTRODUCTION
DEFINITIONS, CONTD
Cash flows: Net cash flows, or simply cash flows,
refers to the current period's cash inflows less cash
outflows
Cash flows are different from accrual income
measures of performance
Cash flow measures recognize inflows when cash
is received but not necessarily earned, and they
recognize outflows when cash is paid but the
expenses not necessarily incurred
INTRODUCTION
SCOPE
Unlike the statement of financial position and the
INTRODUCTION
operations?
What expenses are made with cash from ops?
How are dividends paid when confronting an
operating loss?
Whats the source for cash for debt payments?
How is increase in investments financed?
Whats the source of cash for new plant assets?
Whats the use of cash received from new
financing.
STATEMENT OF CASH
FLOW
PURPOSE OF STATEMENT OF CASH FLOW
Provide information about the sources and application
of cash inflows and outflows for a given accounting
period by separating them into three main business
activities
Operating
Investing
Financing
business activities.
It communicates information about the financial
adaptability of an enterprise for a given period of time.
STATEMENT OF CASH
FLOW
RELEVANCE OF CASH
Cash is the most liquid of assets and offers a
company both liquidity and flexibility
It is both the beginning and the end of a company's
operating cycle
Contrast: Accrual accounting and Cash Basis
Accounting
Recognize revenue when earned and expenses when
incurred,
Recognize revenues when cash is received and expenses
when paid in cash; yet, net cash flow is the end measure of
profitability
STATEMENT OF CASH
FLOW
RELEVANCE OF CASH
It is cash, not income, that ultimately repays loans,
replaces equipment, expands facilities, and pays
dividends
Cash flow analysis helps in assessing liquidity,
solvency, and financial flexibility.
Liquidity is the nearness to cash of assets and liabilities
Solvency is the ability to pay liabilities when they
mature
Financial flexibility is the ability to react and adjust to
opportunities and adversities
STATEMENT OF CASH
FLOW
REPORTING BY ACTIVITIES
Operating activities are the main revenue-producing
activities that are not investing or financing activities.
They include:
Cash receipts from sale of goods.
Cash payments to and on behalf of employees.
Cash receipts from royalties, fees, commissions & other revenue.
Cash receipts and payments under contracts held for dealing/
trading purposes.
Cash receipts and payments of insurance premium and benefits,
annuities and other liabilities arising from policies underwritten.
Cash payments/ refunds of income taxes, unless they can
specifically be classified within the investment/financing
activities.
STATEMENT OF CASH
FLOW
REPORTING BY ACTIVITIES
Investing activities are those that represent
expenditures that have been made for resources
intended to generate future income and cash flows. E.gs
Cash advances & loans to 3rd parties.
Charges arising from loan repayment and advances to 3 rd parties
Payments for purchase of tangible fixed assets, intangible assets
& payments to capitalized development costs & work performed
by the company for its property, plant & equipment.
Payments under forward contracts, futures, options & swap
transactions except contracts held on grounds of dealing/ trading
routine.
STATEMENT OF CASH
FLOW
REPORTING BY ACTIVITIES
Financing activities are means of
contributing, withdrawing, and servicing funds
to support business activities. They include:
Cash reimbursements for funds borrowed.
Cash receipts for issuance of shares/equity
instruments.
Payments to owners for the purchase / redeem of
shares
Cash receipts from issuing debentures, loans, bonds,
mortgage ballots and other funds borrowed.
STATEMENT OF CASH
FLOW
CONSTRUCTING THE Statement of Cash
Flow
Indirect Method
Direct Method
STATEMENT OF CASH
FLOW
Indirect Method
Direct Method
Sh.
Sh.
XX
(XX)
XX
(XX)
XX
XX
XX
(XX)
(XX)
XX
XX
XX
XX
(XX)
(XX)
XX
XX
XX
XX
STATEMENT OF CASH
FLOW
CONSTRUCTING THE STATEMENT OF
STATEMENT OF CASH
FLOW
CONSTRUCTING THE CASH FLOW
STATEMENT OF CASH
FLOW
CONSTRUCTING THE CASH FLOW STATEMENT (Indirect
Method)
Adjustments for changes in balance sheet accounts can be
summarized as follows:
STATEMENT OF CASH
FLOW
CONSTRUCTING THE CASH FLOW STATEMENT (Indirect Method)
STATEMENT OF CASH
FLOW
STEPS IN CONSTRUCTING THE CASH FLOW
STATEMENT
STATEMENT OF CASH
FLOW
STATEMENT OF CASH
FLOW
SPECIAL TOPICS
STATEMENT OF CASH
FLOW
SPECIAL TOPICS
Postretirement Benefit Costs
Current accounting standards require that costs of providing postretirement benefits can be recognized when the employee is still
in active service, rather than when the are actually paid.
Pension and post-retirement costs are liabilities to any company.
The excess of net postretirement benefit expense over cash
benefits paid must be added to net income in computing net cash
flows from operations
Securitization of Accounts Receivable
Securitization involves transformation of receivables into
securities (i.e. those dedicated vehicles representing the assigned
receivables).
Most common reason for securitization of receivables is to raise
cash efficiently.
Companies account for the reduction in receivables as an increase
in cash flow from operations since that relates to a current asset
Analysts should question whether they represent true
improvement in operating performance or a disguised borrowing
STATEMENT OF CASH
FLOW
DIRECT METHOD
Reports gross cash receipts and cash
disbursements related to operations
essentially adjusting each income
statement item from accrual to cash basis
Reports total amounts of cash flowing in and out of a
company from operating activities
Preferred by analysts and creditors
When companies report using the direct method, they
must disclose a reconciliation of net income to cash
flows from operations (the indirect method) in a
separate schedule
ANALYSIS
IMPLICATION
LIMITATION OF CASH FLOWS
Practice does not require separate disclosure of cash
ANALYSIS
IMPLICATION
INTERPRETING CASH FLOW & NET INCOME
ANALYSIS
IMPLICATION
INTERPRETING CASH FLOW & NET
INCOME
Accounting accruals determining net income rely on
CASE ANALYSIS
INFERENCES FROM ANALYSIS OF CASH FLOW
ALTERNATIVE CASH FLOW MEASURES
COMPANY AND ECONOMIC CONDITIONS
FREE CASH FLOW
CASH FLOWS AS VALIDATORS
ANALYSIS OF CASH
FLOW
CASE ANALYSIS OF CASH FLOWS OF
CAMPBELL SOUP
ANALYSIS OF CASH
FLOW
INFERENCES
Where management committed its resources
Where it reduced investments
Where additional cash was derived from
Where claims against the company were
reduced
Disposition of earnings and the investment of
discretionary cash flows
The size, composition, pattern, and stability of
operating cash flows
ANALYSIS OF CASH
FLOW
ALTERNATIVE CASH FLOW MEASURES
Net income plus depreciation and amortization
EBITDA (earnings before interest, taxes, depreciation, and
amortization
The using up of long-term depreciable assets is a real expense
that must not be ignored.
The add-back of depreciation expense does not generate cash.
It merely zeros out the noncash expense from net income as
discussed above
Net income plus depreciation ignores changes in working
capital accounts that comprise the remainder of net cash flows
from operating activities. Yet changes in working capital
accounts often comprise a large portion of cash flows from
operating activities
ANALYSIS OF CASH
FLOW
COMPANY AND ECONOMIC CONDITIONS
While both successful and unsuccessful companies
ANALYSIS OF CASH
FLOW
FREE CASH FLOW
ANALYSIS OF CASH
FLOW
CASH FLOW AS VALIDATORS
Cash Flow Statement provides us with important
clues on:
Feasibility of financing capital expenditures.
Cash sources in financing expansion.
Dependence on external financing.
Future dividend policies.
Ability in meeting debt service requirements.
Financial flexibility to unanticipated
needs/opportunities.
Financial practices of management.
Quality of earnings.
VARIOUS RATIOS
SAMPLE WORKSHEET