CASH FLOW

ANALYSIS
Cash Flow Statement, Concept,
Its Preparation and Relevance
 CONCEPT

Cash Flow Statements - is a financial

statement that classifies changes in the
Balance Sheet items as being Operating,
Investing or Financing activities.

- it gives the user of this

report an idea as to where the funds
came from (sources) and where it went
to (uses) during a given period.
 NATURE &
PURPOSE

Statement of Cash Flows required by PAS 7

provides information about cash inflows and
outflows during an accounting period as well as
the net change in cash from the operating,
investing and financing activities in a manner
that reconciles the beginning and ending cash
balances.
To provide relevant information about a companys
cash receipts and cash payments during an
accounting period that is useful in evaluating the
preceding items.
 PURPOSE

PAS 7 states that the information in a statement of cash flows, if

used with information in the financial statements, should help users
to assess and evaluate..
(a)a companys ability to generate positive future net cash
flows,
(b)a companys ability to meet its obligations and pay
dividends,
(c)a companys need for external financing
(d)the reasons for differences between a companys net
income and associated cash receipts and payments, and
(e)both the cash and noncash aspects of a companys
financing and investing transactions during the accounting
period.
 BASIC
APPROACH

Cash is broadly defined to include

both cash and cash equivalents.
Cash equivalents consist of short-term,
highly liquid investments such as
treasury bills, SEC registered commercial
papers and money market funds.
Such investments are made solely for
the purpose of generating a return on
funds that are temporarily idle.
 CLASSIFICATION OF CASH FLOW
ACTIVITIES

Operating Activities- the amount of cash flows arising

from operating activities is a key indicator of the
extent to which the operations of the enterprise have
generated sufficient cash flows to repay loans,
maintain the operating capability of the enterprise,
pay dividends and make new investments without
recourse to external sources of financing.
-It includes delivering or producing
goods for sale and providing services; and the cash
effects of transactions and other events that enter into
the determination of income.
 EXAMPLES OF
OPERATING ACTIVITIES

IN F L OWS OU T F L OWS

Sales of goods Payments for purchases

Revenue from services of inventories
Interest Payments for operating
Dividends expenses
Receipts from contracts Payments for purchase
held for dealing and from suppliers other than
trading purposes inventory
Tax refunds Payments for lenders
Payment for taxes
 INVESTING ACTIVITIES

It is important because the cash flows

represent the extent to which expenditures
have been made for resources intended to
generate future income and cash flows.
It includes acquiring and selling or
depositing of securities that are not cash
equivalents and productive assets that are
expected to benefit the firm for long periods of
time and lending money and collecting on
loans.
 INVESTING
ACTIVITIES

INFLOWS OUTFLOWS

Sales of long-lived Acquisitions of

assets (PPE;
intangibles and other long-lived assets
long-term assets) Purchases of debt or
Sales of debt or equity equity securities of
securities of other
entities other entities
Collection of loans to Loans to others
others
 FINANCING
ACTIVITIES

It is useful in predicting claims on future

cash flows by providers of capital to the
enterprise.
It includes borrowing from creditors and
repaying the principal; and obtaining
resources from owners and providing
them with a return on the investments.
 FINANCING
ACTIVITIES

INFLOWS OUTFLOWS

Proceeds from Repayment of debt

borrowing principal
Proceeds from Repurchase of a firms
own shares
issuing the firms
Payment of dividends
own equity securities
Acquisitions of the
enterprises own shares
 CONTENT AND FORM

Statement of Cash Flows (SCF) for a period shall report the following:
A. Net Cash
1. Provided or used by operating activities
2. Provided or used by investing activities
3. Provided or used by financing activities
B. Net effect
of those flows on cash and cash equivalents during the period
in a manner that reconciles the beginning and ending cash and cash
equivalents.
Noncash investing and financing activities affecting the
financial position shall be excluded from a cash flow statement. Such
transactions should be disclosed elsewhere in the financial statements
e.g. notes to financial statements.
 METHODS OF ANALYSIS
TO PREPARE SCF

VISUAL INSPECTION METHOD- used when the

financial statements are not complex and when the
relationship between the changes in account balances can
be easily observed and analyzed
WORKSHEET METHOD OF ANALYSIS- used in
practice because analysis of even the most complex set of
financial statements may be documented in a relatively
concise working paper. - before the SCF is prepared, a
worksheet is prepared and the cash flows effects of
operating, investing, and financing activities during the
accounting period are first analyzed.
 PROCEDURE IN
PREPARING SCF

1) Compute the changes for each balance sheet item(except cash and
marketable securities).
2) Dissect the change in the retained earnings account by referring to
the income statement or (better), the statement of retained earnings,
to find the Net Profits(Loss) and any dividends paid.
3) Classify the changes as being under operating (O), investing (I) or
financing (F) activities.
- A positive change in the asset account means use of cash
while a negative change in the asset account means source of cash.
- A positive change in the liability and stockholders equity
account means source of cash, while a negative change means use of
cash.
4) Prepare the formal cash flow statement.
 RELEVANCE OF A
CASH FLOW

It enables its users to analyze the firms

cash flow.
It is used to evaluate progress toward
projected goals.
If the CFS is developed from projected
financial statements, it is intended to
determine whether planned actions are
desirable.