Symphony Theatre

Cash flow statement of

non-financial firms
Cash Flow Statement in Perspective

• Why do we need a cash flow statement?

 Uses and Structure of the Cash Flow
Statement
• Types of activity
– Operating activities
– Investing activities
– Financing activities
 Cash flow from operating activities
• CFO measures the amount of cash generated or
used by the firm as a result of its production and
sales of goods and services.
• Cash outflows associated with operating
activities (e.g., payments to suppliers, employees,
taxes).
 Example: Operating activities
• Cash Inflows from operating activities
– Cash sales of gods and services
– Advances from customers
– Collection of trade receivables
• Cash Outflows from operating activities
– Materials and services
– Salaries and other employee benefits
– Taxes and duties
 Cash flow from investing activities
• CFI reports the amount of cash used to acquire
assets such as plants and equipment as well as
investments and entire businesses.
• These outlays are necessary to maintain a
firm’s current operating capacity and to
provide capacity for future growth.
• CFI also includes cash received from sale or
disposal of assets or segments of business.
 Example: Investing activities
• Cash Inflows from investing activities
– Sales of fixed assets
– Collections of loans
– Sales of shares and bonds of other enterprises
– Interest and dividends received on loans and investments
• Cash Outflows from investing activities
– Payments (including advances or down payments) to buy
fixed assets
– Disbursement of loans
– Payments to buy shares and bonds of other enterprises
 Cash flow from financing activities

• CFF contains cash flows consequences of the

firms’ capital structure decision including
proceeds from the issuance of equity, returns
to shareholders in the form of dividends and
repurchase of equity and incurrence and
repayment of debt.
 Example: Financing activities
• Cash Inflows from financing activities
– Proceeds from issuing shares and bonds
– Proceeds from loans
• Cash Outflows from financing activities
– Payments to buy back or redeem own shares
– Principal payments of bonds and loans
– Payments of interest
– Payments of dividend
Format of the Cash Flow Statement
 Estimating Cash flow from operating
activities
· Indirect method
– Net income is adjusted for non-cash income (expense) items and accruals
to yield cash flow from operations
– Reconciliation of period’s net income and the period’s net cash flow from
operations.
– Listed companies in India must use Indirect method
· Direct method
– Each income item is adjusted for its related accruals
– Inflows (i.e. cash provided by operating activities).
– Outflows (i.e. cash disbursed for operating activities).
– Net cash flow (i.e. inflows - outflows).
· Note: Cash flow from operating activities will be the same under
either method
 Indirect Method
• It starts with net profit and adjusts it for revenue
and expense items that did not involve
operating cash receipts or cash payments in the
current period to arrive at net cash flow from
operations.
Adjustments for Indirect method
 Adjusting Working Capital Items
Adjusting Net Income of the period (accrual) to
cash basis income
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 Estimating CFO (Indirect Method)
Cash flow from operating activities
Profit before Income tax (PBT)
Adjustments to reconcile net profit to net cash flow from operating activities
Depreciation and amortization
Provision for doubtful debts
Foreign exchange Gains and losses
Interest/Dividend Income
Gain and loss on sale of fixed assets/investments
Operating profit before working capital changes
Adjustments for changes in working capital
Trade receivables/bills receivables
Inventories
Prepaid Expenses
Trade payables/Bills payables
Cash generated from operations
Income tax paid
Net Cash flow from operating activities
Estimating CFO (Direct Method)
Cash flow from operating activities
Cash received from customers xxxx

Cash paid to suppliers and employees xxxx

Cash generated from operations xxxx

Income Tax paid xx

Net cash flow from operations xxx

Dog Concierges
Financial Statement
Analysis
Objectives of Financial Statement Analysis

• What is financial statement analysis?

Evaluating past performance and current
position
Monitoring management
Past as a guide to the future
Predicting future performance Forecasting
 Sources of Information

• Company reports
Directors’ report, MD&A Financial
statements
Schedules and notes
Auditor’s report
• Stock exchanges
Business periodicals and television
 Standards of Comparison
• Rule-of-thumb indicators
• Past performance
• Internal standards
• Industry standards
 Techniques of Financial Statement
Analysis
• Horizontal analysis
• Trend analysis
• Vertical analysis
• Ratio analysis
 Profitability Analysis
• Profit margin
• Asset turnover
• Return on assets
• Return on equity
Earnings per share
 Liquidity Analysis
• Current ratio
• Quick ratio
• Receivable turnover
Average collection period
• Inventory turnover
Inventory holding period
• Operating cycle
 Solvency Analysis
• Debt-to-equity ratio
• Liabilities-to-equity ratio
• Interest cover
 Corporate Disclosure Policy
• Why disclosure regulation?
• Mandatory vs. voluntary disclosure
• Forces that drive voluntary disclosure
– Capital market
– Product market
– Managerial labour market
– Shareholder litigation