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

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

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

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.

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

EXAMPLES OF
OPERATING
ACTIVITIES
IN F L OW S

Sales of goods
Revenue from
services
Interest
Dividends
Receipts from
contracts held for
dealing and
trading purposes

OU TF L OW S

Payments for
purchases of
inventories
Payments for
operating expenses
Payments for
purchase from
suppliers other than
inventory

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

INVESTING
ACTIVITIES
INFLOWS

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

OUTFLOWS

Acquisitions of
long-lived assets
Purchases of
debt or equity
securities of
other entities
Loans to 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

FINANCING
ACTIVITIES
INFLOWS

Proceeds from
borrowing
Proceeds from
issuing the
firms own
equity securities

OUTFLOWS

Repayment of
debt principal
Repurchase of a
firms own shares
Payment of
dividends
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

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,

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.