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Week 5 Cash Flow Statement

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23 views

Week 5 Cash Flow Statement

Uploaded by

tunnie sowon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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GDBA 532

Class 5: Cash Flow Statement

Yijing Jiang
[email protected], Office MB14-315
Office hours: by appointment
The Importance of Cash
Management
• One of the crucial aspects of running a
business is to ensure that it does not run out of
cash.

• If there is insufficient cash available to pay the


creditors, the company is in danger of being
declared bankrupt.

2
Cash Flow Statement
Companies prepare cash flow statements to:
• Understand liquidity;
• Identify cash needs;
• Meet regulatory requirements.

3
Cash Inflows and Outflows

Inflows

Cash

Outflows

4
Cash Inflows and Outflows
Borrowings
Collection (debt, loan)
from A/R Issuance
Sales of shares Sale of fixed
assets

Cash

Purchase of Purchase of
Operating Interest
inventory fixed assets
expenses expenses
Dividends

5
Structure of the Cash Flow
Statement
The cash flow statement is presented in four parts:

(i) cash from(or used in) operating activities;


(ii) cash from (or used in) financing activities;
(iii) cash from (or used in) investing activities; and
(iv) change in cash.

6
Cash from Operations
Leon’s Furniture Ltd. Y/E 31/12/18 Y/E 31/12/17
Cash Flow Statement

Operating Activities

Net income $ 111,030 $ 96,593


Add: depreciation 30,628 33,231

(Decrease)/Increase in working
capital & other items 40,416 129,824
Cash provided by operations $ 182,074 $156,603

7
Cash from Operations

• The starting point is net income.

• Add depreciation & amortization to net income.


– These are expenses that do not involve cash flows.

Net Income Cash


Before $1,000 $1,000
depreciation
After $100 $900 $1,000
depreciation
expense

8
Cash from Operations

• The starting point is net income.


• Add depreciation & amortization to net income.

• Adjust for changes in operating assets and liabilities;


– If there’s an increase in operating assets (inventory &
accounts receivable), we deduct the increase from net income,
since these increases tie up cash.

Net Income Cash Inventory


Before $1,000 $1,000 0
Purchased $1,000 $800 $200
$200
inventory

9
Cash from Operations

• The starting point is net income.


• Add depreciation & amortization to net income.

• Adjust for changes in operating assets and liabilities;


– If there’s an increase in operating liabilities (accounts
payable, accrued expenses, etc.), we add the increase to net
income, because these increases provide/release cash.

Net Income Cash Unearned


Revenue
Before $1,000 $1,000 0
Received advanced payment $1,000 $1,300 $300
from customer (unearned
revenue): $300

10
Cash from Operations

• The starting point is net income.


• Add depreciation & amortization to net income.

• Adjust for changes in operating assets and liabilities;


– If there’s an increase in operating liabilities (accounts payable,
accrued expenses), we deduct the increase from net income,
because these increases tie up cash.

Net Income Cash Inventory Acct.


Payable
Before $1,000 $1,000 0 0
Purchased $200 $1,000 $1,000 $200 $200
inventory on
credit
11
Cash from Operations

• The starting point is net income.


• Add depreciation & amortization to net income.
• Adjust for changes in operating assets and liabilities.
– Increases in operating assets (accounts receivable,
inventories, etc.) decrease cash.
– Decreases in operating liabilities (accounts payable, accrued
expenses etc.) decrease cash.

• Adjust for gain/loss on sale of long-term assets.


– Gain on sale of long-term increases net income; loss on sale of
long-term assets decreases net income.
– But this is investing cash flow, not operating cash flow.
– So, we need to deduct the amount from net income.

12
Cash from Operations

• A positive flow of cash from operations is a sign of corporate health.


Without it the company has to borrow to even stay alive.

• A company that shows cash used in operations is in a


precarious situation.

13
Cash from Investing / Financing
Leon’s Furniture Ltd. Y/E 31/12/2014 Y/E 31/12/2013
Cash Flow Statement

Investing Activities
Cash used in purchase of long-term assets $ (20) $ (552)

Financing Activities
Dividends $ (28) $ (28)
Interest (18) (20)
Increase (decrease) in long-term debt (74) 359
Cash provided by financing activities $ (120) $ 407

14
Cash from Investing Activities

• Investing activities involve the acquisition and disposal of long-


term assets, such as property, plant, equipment, investments in
securities, and other assets not directly related to the company's
core operating activities.

• The cash from investing activities section of the cash flow


statement provides insights into how a company invests its
financial resources to support its growth, expansion, and
strategic objectives.

15
Cash from Financing Activities

• Financing cash flows refer to the cash inflows and outflows


related to the financing activities of a business, including
transactions involving debt and equity financing.

• Debt financing:
– Cash inflows include issuance of debt, bond, loans, etc.
– Cash outflows include interest payments and repayment of principal.
• Equity financing:
– Cash inflows include proceedings from issuing stocks.
– Cash outflows include cash dividends and repurchase of stocks.

16
Leon’s Furniture Ltd. Y/E 31/12/2014 Y/E 31/12/2013
Cash Flow Statement

Operating Activities $ 152 $ 76


Cash provided by operations

Investing Activities $ (20) $ (552)


Cash used in purchase of long-term assets

Financing Activities $ (120) $ 407


Cash provided by financing activities

Change in cash $ 12 $ (69)


Cash at start of year $ 6 $ 75
Cash at end of year $ 18 $ 6

17

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