CASH FLOW STATEMENT

“THE FACT IS THAT ONE OF

THE EARLIEST LESSONS I
LEARNED IN BUSINESS WAS
THAT BALANCE SHEETS AND
INCOME STATEMENTS ARE
FICTION, CASH FLOW IS
REALITY.”
-Mr. Chris Chocola
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BASIC CONCEPT

Reports an
organization's
cash flows i.e.,
cash receipts
and cash
payments
during a
particular
financial year
 PURPOSES OF CASH FLOW
STATEMENT
 Predict future cash flows
 Evaluate management
decisions
 Determine the ability to
pay dividends to
stockholders’ and
payments to creditors
 Show the relationship of
net income to the
business’s cash flows
 IMPORTANCE OF CASH FLOW
STATEMENT

To identify the sources from where cash

inflows have arisen within a particular period
and also shows the various activities where in
the cash was utilized.
It is significant to management for proper
cash planning and maintaining a proper
matching between cash inflows and outflows.
Shows efficiency of a firm in generating cash
inflows from its regular
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operations.
Reports the amount of cash used during the period in
various long-term investing activities, such as
purchase of fixed assets.
Reports the amount of cash received during the
period through various financing activities, such as
issue of shares, debentures and raising long-term
loan.

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WHAT IS CASH?
 FORMS OF CASH

∗ Cash in hand
∗ Cash in bank
∗ Cash equivalents - highly liquid, short-term investments
that can be converted into cash with little delay
THREE CASH FLOW ACTIVITIES
CASH FLOW FROM OPERATING
ACTIVITIES
CASH FLOW FROM OPERATING
ACTIVITIES
MORE ON OPERATING ACTIVITIES

 Operating activities are normal and core activities

within a business that generate cash inflows and
outflows. They include:
∗ Total sales of goods and services collected during a
period;
∗ Payments made to suppliers of goods and services
used in production settled during a period;
∗ Payments to employees or other expenses made
during a period.
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 DEFINITION OF OPERATING
ACTIVITIES

∗ An accounting item indicating the money a company

brings in from ongoing, regular business activities,
such as manufacturing and selling goods or providing
a service. Cash flow from operating activities does not
include long-term capital or investment costs. It does
include earnings before interest and taxes plus
depreciation minus taxes.

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CASH FLOW FROM INVESTING
ACTIVITIES
CASH FLOW FROM INVESTING
ACTIVITIES
 DEFINITION OF INVESTING
ACTIVITIES

∗ An item on the cash flow statement that reports the

aggregate change in a company's cash position
resulting from any gains (or losses) from investments
in the financial markets and operating subsidiaries,
and changes resulting from amounts spent on
investments in capital assets such as plant and
equipment.
INFLOW OR OUTFLOW OF CASH

∗ Examples of Inflows:
 Proceeds from disposal of property, plant and
equipment
 Cash receipts from disposal of debt instruments of
other entities
 Receipts from sale of equity instruments of other
entities

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∗ Examples of Outflows:
 Payments for acquisition of property, plant and
equipment
 Payments for purchase of debt instruments of
other entities
 Payments for purchase of equity instruments of
other entities
 Sales/maturities of investments
 Includes purchasing and selling long- term assets
and other investments.
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CASH FLOW FROM FINANCING
ACTIVITIES
CASH FLOW FROM FINANCING
ACTIVITIES
 CASH FLOW FROM FINANCING
ACTIVITIES

∗ A category in a company’s cash flow statement that

accounts for external activities that allow a firm to
raise capital and repay investors, such as issuing cash
dividends, adding or changing loans or issuing more
stock. Cash flow from financing activities shows
investors the company’s financial strength. A company
that frequently turns to new debt or equity for cash,
for example, could have problems if the capital
markets become less liquid.
∗ FORMULA: Cash received from issuing stock or debt -
cash paid as dividends and Re-acquisition of
debt/stock.
 Two Formats for
Operating Activities
 INDIRECT METHOD

Indirect method reconciles from

net income to net cash provided by
operating activities

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 DIRECT METHOD

∗ Direct method reports all cash

receipts and cash payments
from operating activities

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DIFFERENCE BETWEEN INDIRECT
& DIRECT METHOD

” The only difference between the two

methods is, how cash flows from
operating activities are calculated.”

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FORMAT OF INDIRECT METHOD

∗ Net Income
∗ + Depreciation exp (noncash exp)
∗ + Losses from sale of assets
∗ (full amount of sale already included in investing
section)
∗ - Gains from sale of assets
∗ (full amount of sale already included in investing
section)
∗ - increases in current assets
∗ + decreases in current assets
∗ + increases in current liabilities
∗ - decreases in current liabilities
∗ = Net cash from operating activities

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FORMAT OF DIRECT METHOD

∗ + Cash Received from Customers

∗ - Cash paid for inventory
∗ - Cash paid for operating expenses
∗ - Cash paid for income taxes
∗ - Cash paid for interest
∗ + Cash received from dividends and interest
∗ = Net cash from operating activities

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8 STEPS OF CONSTRUCTING CASH
FLOW

STEP 1:
Start with Net Income
STEP 2:
Adjust Net Income for non-cash expenses and gains
STEP 3:
Recognize cash inflows (outflows) from changes in
current assets and liabilities
STEP 4:
Sum to yield net cash flows from operations
STEP 5:
Changes in long-term assets yield net cash flows from
investing activities
STEP 6:
Changes in long-term liabilities & equity accounts yield
net cash flows from financing activities
STEP 7:
Sum cash flows from operations, investing, and
financing activities to yield net change in cash
STEP 8:
Add net change in cash to the beginning cash balance to
yield ending cash
ANALYSIS IMPLICATIONS OF CASH
FLOWS
 MANAGING YOUR FIRM’S CASH
FLOW

 A healthy cash flow is an essential part of any successful

business. Some business people claim that a healthy
cash flow is even more important than your business's
ability to deliver its goods or services. Maintaining a
viable cash flow system relies on SIX IMPORTANT
ASPECTS discussed further :

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1. Understanding cash flow is the first step in effectively
managing your cash flow. There's more to it than just a
fancy term for the movement of money into, and out
of, your business checking account.

2. Analyzing your cash flow will help you spot some of the
problem areas in the cash flow cycle of your business.
As in any good analysis, you need to look individually at
each of the important components that make up the
cash flow cycle to determine if it's a problem area or
not. 34
3. Developing a cash flow budget provides a good way
of predicting your business's cash flow for the next
month, six months or even the next year.

4. Improving your cash flow will, without a doubt, make

your business more successful. Accelerating your cash
inflows and delaying your cash outflows are key
factors for improving and managing your cash flow.
The cash flow budget is also a handy tool to use in the
improvement and management of your cash flow.
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5. Filling your cash flow gaps: from time to time, almost
every business experiences the need for more cash
than it has. If you find yourself in this position, you may
have to borrow money to fill the gap.

6. Handling any cash surplus is just as important as the

management of money into and out of your cash flow
cycle. With the proper management of your cash flow,
you might find yourself with a little extra cash, on which
you can earn investment income.
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EXAMPLES OF CASH FLOW
STATEMENTS OF SOME
FAMOUS BRANDS

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COMPARATIVE
CASH FLOW
STATEMENT
OF COCA-COLA

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FOR YEAR 2011, 2012 & 2013

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 JOHNSON
AND
JOHNSON’S
CASH FLOW
STATEMENT
(in 3 Parts)
`
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J&J: OPERATING ACTIVITIES

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J&J: INVESTING ACTIVITIES

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J&J: FINANCING ACTIVITIES

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 RELIANCE’S
CASH FLOW
STATEMENT

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COMPARATIVE CASH FLOW
STATEMEN T FOR 5 YEARS

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DISADVANTAGES OF
CASH FLOW
STATEMENT

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Limitations of Cash Flow Statement

1. One of the potential disadvantages of the cash flow

statement is that it does not take into consideration
any future growth. When looking at the statement of
cash flows, you are essentially looking at information
from the past business operations.

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 For example: If the company is in the process of
developing a ground-breaking piece of technology, it
could be about to generate a large amount of cash. If
you just look at the cash flow statement, you may not
evaluate the future potential of the company
correctly.

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2. Another potential problem with the statement of cash flows
is that interpreting data may be difficult. The information on a
cash flow statement is not necessarily easy to interpret. You
can see where all of the cash flow is going, but you may not
know if it should be going there.

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For example, it may be difficult to gauge whether the
company should be investing more in a plant or paying off
debt. You have to take all of the information presented
and make the best assumptions you can make.

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3. Cash flow statements are not suitable for judging the
profitability of a firm, as non-cash charges are ignored
while calculating cash flows from operating activities.

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4. As a cash flow statement is based on a cash basis of
accounting, it ignores the basic accounting concept of
accrual.
WHAT IS ACCURAL-BASED ACCOUNTING?
 A method that records income items when they are
earned and records deductions when expenses are
incurred.

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5. Business owners who experience cash flow
difficulties are likely to make late payments for
business supplies and other expenses. An honest and
creative business owner who is on good terms with
his suppliers will likely develop strategies for
managing these situations.

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 For Example: A restaurant owner who offers his
produce vendor a free meal while explaining that his
payment will be late. A cash flow statement cannot
capture these negotiations and agreements, but they
are nonetheless a very real part of doing business.

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 AT THE END...

 A cash flow statement is a document depicting a

company's liquidity, or its ability to meet current
expenses using currently available resources. Cash
flow statements are useful for providing a business
with a general idea of how it will make ends meet in
the short term. But cash flow statements do not
show the full complexity of a business' strategies and
resources for staying afloat or growing, and they
depend on assumptions that are not always accurate.
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THANK YOU!

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