FINANCIAL STATEMENT ANALYSIS

Presentation Topic: Cash Flow Statement

Presented by: Badar Munir Kamran Bangash Moin Ali Baig 331 308 328
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CASH FLOW STATEMENT

A summary of a firm's cash receipts and cash payments during a period of time.

Firms cash inflows and outflows during a period of time.

CASH FLOW STATEMENT

Cash inflows: The money coming into the business.

Cash outflows: The money going out from the business.

CASH FLOW STATEMENT

Cash Outflows

Business

Cash Inflows

IMPORTANCE OF CASH FLOW STATEMENT

Internal personnel and external entities will use the statement of cash flows as an analytical tool and used for analysis of firm.
A cash flow provides an investor insight into a company's credit worthiness and overall financial health.

USES OF CASH FLOW STATEMENT

1.

2.

3.

4. 5.

6.

It helps the newly formed companies to know their inflow and outflow of cash. It helps the investors to judge whether the company is financially sound or not. It helps the company to know whether it will be able to cover the payroll and other expenses. It helps the lenders to know the companys ability to repay. These statements help to have an accurate analysis of the firms ability to meet its current liabilities. A cash flow statement is helpful for planning and managing future financial commitments.
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USERS OF CASH FLOW STATEMENT

1. 2. 3. 4. 5.

Managers (Internal) Potential lenders or creditors Investors Students Govt.

CASH FLOW STATEMENT

The cash flow statement is partitioned into three segments.

Operating activities Investing activities Financing activities

1. 2. 3.

Cash Flow Statement

Operating activities:

Investing activities:

Financing activities:

Cash Flows from Operating Activities

Typical cash inflows What are some of the typical cash inflows from operating activities?` Typical cash outflows What are some of the typical cash outflows from operating activities?

Sales of goods and services

Interest revenue Dividend revenue

Merchandise purchases
Payments of wages and other expenses
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Tax payments

Cash Flows from Investing Activities

Typical cash inflows What are some of the typical cash inflows from investing activities? Sales of fixed assets Sale of longterm investments Typical cash outflows What are some of the typical cash outflows from investing activities? Purchase of fixed assets Purchase of long-term investments

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Cash Flows from Financing Activities

Typical cash inflows What are some of the typical cash inflows from financing activities? Issuing bonds and long-term notes payable Typical cash outflows What are some of the typical cash outflows from financing activities? Paying cash dividends Repaying debt Acquiring treasury stock

Issuing preferred and common stock

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Reporting Cash Flows

Increases in Cash Decreases in Cash

Operating
(receipts from revenues)

Operating
(payments for expenses)

Investing
(receipts from sales of noncurrent assets)

Investing
(payments for acquiring noncurrent assets)

Financing
(receipts from issuing equity and debt securities)

Financing
(payments for treasury stock, 13 dividends, and redemption of debt securities)

PREPARING A STATEMENT OF CASH FLOW

There are two methods of preparing the statement of cash flows 1. Indirect method 2. Direct method
The indirect method derives cash flows from

accrual basis statements. The direct method determines cash flows directly for each source or use of cash.

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The Statement of Cash Flows: Indirect Method

Accrual Basis Statements Cash Flow Statement

Income Statement items & Changes in Current Assets and Current Liabilities Balance Sheet: Changes In Non-Current Assets Balance Sheet: Changes in Non-Current Liabilities and Equity

Operating activities: Adjust net income for accruals and non-cash charges to get cash flows Investing activities: Inflows from sale of assets and Outflows from purchases of assets Financing activities: Inflows and outflows from loan and equity transactions

Format of the Statement of Cash Flows: Indirect Method

Cash flows from operating activities: Net Income $ XXX Adjustments (to arrive at cash flow from operations) $ XX (List of individual inflows and outflows) Net cash flow from operating activities $ XXX

Cash flows from investing activities: (List of individual inflows and outflows) $ XX Net cash flow from investing activities $ XXX
Cash flows from financing activities: (List of individual inflows and outflows) $ XX Net cash flow from financing activities $ XXX

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Indirect Method: Special Items

Note the following adjustments to net income in deriving operating cash flow:
Loss

on sale of assets is added to net income Gain on sale of assets is deducted from net income Discount on bonds payable (as amortized) is added to net income Premium on bonds payable (as amortized) is deducted from net income

Format of the Statement of Cash Flows: Direct Method

Cash flows from operating activities: Cash receipts (individually): Inflows $ XXX Cash payments to suppliers (separately): outflows ($ XXX) Net cash flow from operating activities $ XXX

Cash flows from investing activities: (List of individual inflows and outflows) $ XX Net cash flow from investing activities $ XXX Cash flows from financing activities: (List of individual inflows and outflows) $ XX Net cash flow from financing activities $ XXX

Comparative Balance Sheet Shiner Corporation Assets Cash Accounts Receivable Prepaid Expenses Land Building Accumulated Depreciation Equipment Accumulated Depreciation Total Assets Dec 31, 1996 Dec 31, 1995 $37,000 $26,000 $6,000 $70,000 $200,000 $11,000 $68,000 $10,000 $58,000 $386,000 $189,000 $49,000 $36,000 $0 $0 $0 $0 $0 $0 $85,000
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Liabilities and Stockholder Equity

Accounts Payable

$40,000

$5,000

Bonds Payable
Common Stock Retained Earnings

$150,000
$60,000 $136,000

$0
$0 $20,000

Total Liabilities and Stockholder Equity

$386,000

$85,000

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Income Statement Shiner Corporation

Revenue

$492,000

Operating Expenses

$269,000

Depreciation

$21,000

$290,000

Income before Income Taxes

$202,000

Income Tax Expense

Net Income

$68,000
$134,000
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Statement of Cash Flows Cash Flow from Operating Activities Net Income Adjustments to reconcile net income to net cash Accts Receivable decrease Prepaid Expense increase Accts Payable Increase Depreciation Net cash provided from Operating Activities Investing Activities Land Purchase Building Purchase Equipment Purchase ($70,000) ($200,000) ($68,000) $10,000 ($6,000) $35,000 $21,000

$134,000

$60,000 $194,000

($338,000)

Financing Activities
Dividend payment to shareholders Issuance of Bonds Payable Net Decrease in Cash Cash Jan 1, 1996 Cash Dec 31, 1996 ($18,000) $150,000 $132,000 ($12,000) 23 $49,000 $37,000