CHAPTER: 7

CASH FLOW ANALYSIS

 Objective
™ Providing concept on Cash flow
statement
™ Explaining the key items in Cash flow
statement
™ Analysis the different methods in the
making cash flow statement
™ Interpreting resulting in cash flow
statement
 Definition of Cash
The term cash on the statement of cash flows
refers broadly to both currency and cash
equivalents.
Currency and
Bank Accounts

Treasury Bills
Cash
Money Market
Funds Commercial Paper
 Constructing the Statement of
Cash Flows
Assets = Liabilities + Stockholders
Stockholders’’ Equity
Changes in Changes in
Capital Stock Liabilities

Net Cash
Flows for a
Dividends Period Changes in
Paid to Noncash
Stockholders Assets

Net Income
 Statement of cash flows
The statement of cash flows shows the
sources and uses of cash, which is a basis
for cash flow analysis bases on
operating activities,
activities investing
activities,
activities and financing activities.
activities
 Sources and Uses
Activities that bring in cash are
called sources of cash.
„ Sources:
„ Cash inflow – occurs when
we “sell” something
„ Sale of assets
„ Decrease in asset account
„ Increase in liability or equity
account
„ Depreciation and other
noncurrent assets
„ Net profit after taxes
Activities that involve spending
cash are called uses (or
applications) of cash.
„ Uses:
„ Cash outflow – occurs when
we “buy” something
„ Repurchase or retirement of
stocks
„ Net loss
„ Increase in asset account
„ Decrease in liability or
equity account
„ Dividend paid
 Cash Flow from Operating
Activities
Transactions that make up net income and
also affect current assets and current liabilities
on the balance sheet
„ Inflows – cash receipts „ Outflows – cash paid
from earning revenues from incurring expenses
„ Sale of goods or services „ Salaries and wages
„ Interest revenue „ Payments to suppliers for
„ Dividend revenue inventory
„ Other revenues „ Taxes and fines
„ Interest paid to lenders
„ Other expenses
 Cash Flow from Investing
Activities
Transactions that increase and decrease
long-term assets
„ Inflows „ Outflows
„ Selling long-term „ Purchase long-term
productive assets productive assets
„ Selling equity investments „ Purchase equity
„ Collecting of principal on investments
loans „ Purchase debt
„ Other investments
„ Make loans
 Cash Flow from Financing
Activities
Increases and decreases in long-term
liabilities and owner’s equity
„ Inflows „ Outflows
„ Issuing stock „ Cash dividends or
„ Issuing bonds and withdrawals by owner
notes „ Purchase treasury
stock
„ Repay cash loans
Format of the Statement
of Cash Flows
Two acceptable methods for reporting
cash flows from operating activities
1. Indirect method (98.8%)
2. Direct method (1.2%)
 Acme Manufacturing
Comparative Balance Sheets
For the Years Ended December 31, 19x4 and 19x5
19x4 19x5 Change
ASSETS
Cash $112,500 $350,000 237,500
Accounts receivable 350,000 281,250 (68,750)
Inventories 125,000 150,000 25,000
Plant and equipment 1,000,000 1,025,000 25,000
Accumulated depreciation (500,000) (525,000) (25,000)
Land 500,000 718,750 218,750
Total assets $1,587,500 $2,000,000
LIABILITIES AND EQUITY
Accounts payable $300,000 $237,500 (62,500)
Mortgage payable 0 250,000 250,000
Common stock 75,000 75,000 0
Contributed capital in excess of par 300,000 300,000 0
Retained earnings 912,500 1,137,500 225,000
Total liabilities and equity $1 587.500 $2.000.000
 Acme Manufacturing
Income Statement
For the Years Ended December 31,19x5

Revenues $1,200,000
Gain on sale of equipment 50,000
Less: Cost of goods sold (640,000)
Less: Depreciation expense (125,000)
Less: Interest expense (35,000)
Net income $450,000
 Indirect Method - Statement
of Cash Flows
Cash Flow from Operating Activities
Net Income $450,000
Gain on sale of equipment (50,000)
Decrease in accounts receivable 68,750
Increase in inventory (25,000)
Depreciation Expense 125,000
Decrease in accounts payable (62,500)
Net cash provided (used) by
operating activities $506,250
 Indirect Method - Statement of
Cash Flows
Cash Flow from Investing Activities

Sale of equipment $175,000

Purchase of equipment (250,000)
Purchase of land (218,750)

Net cash provided (used) by

investing activities (293,750)
 Indirect Method - Statement
of Cash Flows

Cash Flow from Financing Activities

Mortgage received $250,000

Dividends (225,000)

Net cash provided (used) by

financing activities $ 25
 Indirect Method --
Statement of Cash Flows
Increase (decrease) in cash
and cash equivalents $ 237,500
Cash and cash equivalents, 19X4 112,500
Cash and cash equivalents, 19X5 $350,000
 Acme Manufacturing
Statement of Cash Flow
For the Year Ended December 31, 19X5 Indirect Method
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $450,000
Add (deduct) adjusting items:
Gain on sale of equipment (50,000)
Decrease in accounts receivable 68,750
Increase in inventory (25,000)
Depreciation expense 125,000
Decrease in accounts payable (62,500)
Net Operating Cash $506,250
INVESTINGACTIVITIES
Sale of equipment $175,000
Purchase of equipment (250,000)
Purchase of land (218,750)
Net cash from investing activities (293,750)
FINANCING ACTIVITIES
Mortgage received $250,000
Dividends (225,000)
Net cash from financing activities 25
Net increase in cash $237,500
Cash and cash equivalents, 19X4 112,500
Cash and cash equivalents, 19X5 $350,000
 Direct Method - Statement of
Cash Flows

Cash Flow from Operating Activities

Cash received from customers a $1,268,750
Cash paid to suppliers b ($727,500)
Cash paid for Interest (35,000 )
Net cash provided (used) by
operating activities $ 506,250

a, b, See Worksheet on next slide for calculation

 Worksheet for Preparing
Operating Activities Section

(a) Revenue $1,200,000

+(-) Decrease (increase) in AR $68,750
Cash received from customers $1,268,750

(b) COGS $640,000

+(-) Increase (decrease) in inventory $25,000
Decease in Account Payable $62,500
Cash paid to suppliers and $727,500
 Direct Method - Statement of
Cash Flows

Cash Flow from Financing Activities

Cash received from issued Mortgage $250,000

Cash paid for Dividends ($225,000)

Net cash provided (used) by

financing activities $ 25
Direct Method - Statement
of Cash Flows
Increase (decrease) in cash
and cash equivalents $ 237,500
Cash and cash equivalents, 19X4 112,500
Cash and cash equivalents, 19X5 $350,000
 Acme Manufacturing
Direct Method
Statement of Cash Flow
For the Year Ended December 31, 19X5
Cash Flow from Operating Activities
Cash received from customers $ 1,268,750
Cash paid to suppliers (727,500)
Cash paid for Interest (35,000)
Net Operating Cash 506,250
Cash Flow from Investing Activities
Cash receipted from Sale of equipment $ 175,000
Cash Paid for Purchase of equipment (250,000)
Cash Paid for Purchase of land (218,750)

Net cash from investing activities (293,750)

Cash Flow from Financing Activities
Cash received from issuance Mortgage $ 250,000
Cash Paid for Dividends (225,000)
Net cash from financing activities 25
Net increase in cash $ 237,500
Cash and cash equivalents, 19X4 112,500
Cash and cash equivalents, 19X5 350,000
 Balance Sheet_ABC MFI
Balance Sheet (Auditor 2) Balance Sheet (Auditor 1)
As 31 December 2007
As 31 December 2007
178,397-678,397=-500,000 2007
2007
US$ US$
ASSETS Assets
Cash on Hand 75,474 Cash on hand 75,474
Balances with the Central Bank 70,668 Deposits and placements with banks 609,647
Balances with Banks 107,729 Statutory deposits 68,750
Loans and Advances to Customers 10,216,909 Loans to customers 10,216,909
Other Assets 697,261 Other receivables 197,261
Deferred Tax Assets 2,689 Deferred tax assets 2,689
Property and Equipment 176,469 Intangible assets 62,818
697,261-197,261=500,000
Intangible Assets 62,818 Property and equipment 176,469
TOTAL ASSETS 11,410,017 Total assets 11,410,017
LIABILITIES AND EQUITY Liabilities and shareholders’ equity
LIABILITIES Deposit from customers 1,190,584
Customers’ Deposits 1,190,584 Borrowings 6,129,766
Borrowings 6,129,766 Other liabilities 378,579
Accruals and Other Liabilities 534,449 Provision for income tax 155,870
Deferred Revenue 246,017 Deferred grant income 246,017
TOTAL LIABILITIES 8,100,816 Total liabilities 8,100,816
EQUITY Shareholders’ equity
Share Capital 500,000 Share capital 500,000
Donated Capitals 1,842,030 Donated capital 1,842,030
Retained Earnings 967,171 Retained earnings 967,171
TOTAL EQUITY 3,309,201 Total Shareholders’ equity 3,309,201
TOTAL LIABILITIES AND EQUITY 11,410,017 Total liabilities and shareholders' equity 11,410,017
 Cash Flow Statement_ABC MFI
Statement of cash flows (Auditor 2)
2007 Statement of cash flows (Auditor 1)
Year ended 31 December 2007
US$ Year ended 31 December 2007
Cash flows from operating activities 2007
Net profit before tax 807,441
US$
Adjustment for:
Provision for doubtful loans - Cash flows from operating activities
Depreciation of property and equipment 59,763
Net cash used in operating activities (4,038,001)
Gain on disposal of property and equipment (3,447)
Amortization of intangible assets 17,326 Cash flows from investing activities
Cash flows generated from operations 881,083
Purchase of intangible assets (22,921)
Changes in working capital:
Increase in guarantee deposit with the Central Bank (610) Purchase of property and equipment (136,279)
Increase in reserve requirement with the Central Bank (30,335)
Proceeds from disposals of property
Increase in loans and advances to customers (5,681,483) and equipment 3,447
Decrease/(Increase) in other assets (664,845)
Decrease/(Increase) in deferred tax assets (68) Net cash used in investing activities (155,753)
Increase in customers’ deposits 619,316 Cash flows from financing activities
Increase in deferred revenue 366,159
Increase in other accrued and liabilities 368,194 Proceeds from borrowings 4,873,593
Tax paid 664,845-164,845=500,000 (164,815) Repayments of borrowings (816,409)
Net cash used in operating activities (4,592,326)
Cash flows from investing activities Proceeds from issuance of share
Purchases of property and equipment (136,279) capital -
Purchases of intangible assets (22,921) Net cash generated from financing
Proceeds from disposal of property and equipment 3,447 activities 4,057,184
Net cash used in investing activities (155,753)
Cash flows from financing activities Net increase/(decrease) in cash and
Proceeds from borrowings 4,873,593 cash equivalents (136,570)
Repayments of borrowings (816,409)
Cash and cash equivalents at
Proceeds from increase in donated capital 54,325 beginning of year 821,691
Net cash generated from financing activities 4,111,509
Net increase /(decrease) in cash and cash equivalents (636,570) Cash and cash equivalents at end of
Cash and cash equivalents at beginning of the year 821,691 year 685,121
Currency revaluation at balance sheet date 0 185,121-685,121=-500,000
Cash and cash equivalents as at end of the year 185,121
 ABC _MFI
Statement of cash flows
Year ended 31 December 2007
2007
US$
Cash flows from operating activities
Net profit after tax 642,626
Adjustment for:
Provision for doubtful loans -
Depreciation of property and equipment 59,763
Gain on disposal of property and equipment (3,447)
Amortization of intangible assets 17,326
Cash flows generated from operations 716,268
Changes in working capital:
Increase in reserve with the Central Bank (30,945)
Increase in loans and advances to customers (5,681,483)
Decrease/(Increase) in other assets (164,845)
Decrease/(Increase) in deferred tax assets (68)
Increase in customers’ deposits 619,316
Increase in deferred revenue 81,238
Increase in other accrued and liabilities 368,193
Net cash used in operating activities (4,092,326)
Cash flows from investing activities
Purchases of property and equipment (136,279)
Purchases of intangible assets (22,921)
Proceeds from disposal of property and equipment 3,447
Net cash used in investing activities (155,753)
Cash flows from financing activities
Proceeds from borrowings 4,873,593
Repayments of borrowings (816,409)
Proceeds from increase in donated capital 54,325
Net cash generated from financing activities 4,111,509
Net increase /(decrease) in cash and cash equivalents -136,570
Cash and cash equivalents at beginning of the year 821,691
Cash and cash equivalents as at end of the year 685,121
Conclusion
- The cash flow statement is the analytical tool to determine the
firm’s cash position.
- Indirect and direct methods were used to form cash flow
statement. The indirect method is the most popular way in
preparing the cash flow statement which starts from net income
after tax while direct method was formed from direct cash receipt
minus the cash payment.
- In preparing cash flow statement three activities were classified to
operating, investing, and financing activities which categorize by
sources and uses of cash by obtaining data from income
statement and balance sheet.
- Through the cash flow statement ABC_MFI showed that the
different classification of assets account especially cash effected
to the result of cash position in cash flow statement.
Reference
1. Schaum’s Outline of Theory and Problems of MANAGERIAL
ACCOUNTING, second edition, 1999; JAE K. SHIM, Ph.D and JOEL.
G. SIEGEL, Ph.D.CPA
2. Schaum's Outline of Theory and Problems of Financial Management,
second edition, 1998; JAE K. SHIM, Ph.D and JOEL. G. SIEGEL,
Ph.D.CPA
3. Fundamentals of Corporate Finance Third Edition, 2001; Richard A.
Brealey, Stewart C. Myers, Alan J. Marcus, and Wallace E. Carroll
4. Fundementals of financial management, tenth edition; Brigham and
Houston.
5. ACCOUNTANTS’ HANDBOOK VOLUME ONE: FINANCIAL
ACCOUNTING AND GENERAL TOPICS ELEVENTH EDITION, 2007; D.
R. CARMICHAEL, O. RAY WHITTINGTON, LYNFORD GRAHAM
6. Spiceland, Sepe and Tomissini (2007). Intermediate Accounting
7. Block and Hirt (2008) Foundation of Financial Management
8. Slides of Chapter 7: Cash flow analysis from Lecturer Pasco,
Rodrigo, CPA/MBA
9. Slides handouts from internet search_google_Cash flow analysis.ppt.
10. Audited Financial Report of ABC MFI for 2007