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CASH FLOW

STATEMENT ANALYSIS
Purpose of a statement of cash flows:
• To provide information about the cash inflows and outflows of
an entity during a period.
• To summarize the operating, investing, and financing activities
of the business.

The cash flow statement helps users to assess a company’s


liquidity, financial flexibility, operating capabilities, and risk.
The statement
Specifically, of cash flows
the information is useful
in a statement of because
cash flows,itifprovides
used
with information
answers to theinfollowing
the other financial statements,
important helps external
questions:
users to assess:
• Where did cash come from?
1. A company’s ability to generate positive future net cash flows,
2.• What was ability
A company’s cashtousedmeet for?
its obligations and pay dividends,
3.• What
A company’s
was need
the for externalin
change financing,
the cash balance?
4. The reasons for differences between a company’s net income and
associated cash receipts and payments, and
5. Both the cash and noncash aspects of a company’s financing and
investing transactions.
OBJECTIVE:
• •Information
In financialabout
accounting, a cash
the cash flowsflow statement,
of an enterprisealso knowninas
is useful
statement
providing of cash
users flows, isstatements
of financial a financial with
statement
a basisthat shows
to assess
how
the changes
ability inenterprise
of the balance sheet accountscash
to generate andand
income
cashaffect
cash and cash
equivalents and equivalents,
the needs ofand the breaks the analysis
enterprise to utilisedown
thoseto
operating,
cash flows. investing and financing activities.

• •Cash
Essentially, the cash flow
flow information statement
is useful is concerned
in assessing withofthe
the ability theflow
of cash into
enterprise and out of the
generate cashbusiness.
and cashThe statement
equivalent. captures
It also
both thethe
enhances current operatingof
comparability results and the accompanying
the reporting of operating
changes in the
performance balance sheet.
by different enterprises because it eliminates the
effects of using different accounting treatments for the same
transactions and events.
People and groups interested in
cash flow statements include:
• Accounting personnel, who need to know
whether the organization will be able to
cover payroll and other immediate
expenses.

• Potential lenders or creditors, who want a


clear picture of a company's ability to repay.

• Potential investors, who need to judge


whether the company is financially sound.

• Potential employees or contractors, who


need to know whether the company will be
able to afford compensation

• Shareholders of the business.


The cash flow statement is
intended to:
• Provide information on a firm's liquidity and
solvency and its ability to change cash flows in
future circumstances.

• Provide additional information for evaluating


changes in assets, liabilities and equity.

• Improve the comparability of different firms'


operating performance by eliminating the
effects of different accounting methods.

• Indicate the amount, timing and probability of


future cash flows.
Cash flow activities:
The cash flow statement is partitioned into three segments,
namely:

• Cash flow resulting from operating activities;


• Cash flow resulting from investing activities;
• Cash flow resulting from financing activities.
The money coming into the business is called cash inflow, and
money going out from the business is called cash outflow.
Operating activities
• Operating activities include the production, sales and
delivery of the company's product as well as collecting
payment from its customers. This could include
purchasing raw materials, building inventory, advertising,
and shipping the product.

• Usually associated with working capital accounts like


Accounts receivable, inventory, salaries payable, etc.
Operating Activities
INFLOWS OUTFLOWS

• From sale of goods and • To suppliers for inventory


services and other materials
• From receiving dividends • To employees for services
investments • To other entities for
• From receiving interest from services (insurance, etc.)
investments or loans • To government for taxes
• From sale of trading securities • To lenders for interest
• From reduced income taxes • To purchase trading
due to “excess tax deduction” securities
related to stock options
Investing Activities
• Investing activities relate to the acquisition and
disposal of long-term tangible and intangible
assets and other investments
• Cash flows from investing activities are an
indication of the expansion or downsizing of
operating capacity
• Examples:
• Payments for newly acquired equipment
• Receipts from the disposal of a building
• Payments for new investments
Investing Activities
INFLOWS OUTFLOWS

• From sale of property, • To purchase property,


plant and equipment plant and equipment
• From sale of debt or • To purchase debt or
equity investments of equity securities of other
other entities* entities
• From collections of • To make loans to other
principal on loans to entities
other entities
Financing Activities
• Financing activities relate to changes in the size and
composition of contributed capital and financial debt of
the company
• Examples:
• Receipts from issuing new shares or bonds
• Receipts from new bank loan
• Payments for buy-back of shares
• Repayments of loans
• Payments of interest and dividend
Financing Activities
INFLOWS OUTFLOWS

• From issuance of debt • To stockholders as


(bonds and notes) dividends
• From issuance of equity • To repay or retire long-
securities: term debt, including
-Common stock capital leases for lessee
-Preferred stock (interest on leases is
-Re-issuance of treasury classified as operating)
stock • To reacquire capital stock
(treasury stock)
Examples