Cash Flow StatementCash Flow StatementPresentation By:

•Ahmed Muhammad Masood Niazi straight from Mianwali •Saqib Tariq CHAUDHRY from Muniawala•Saad Javed Satti from Kotli Sattiyan•Mirza Umer Baig from Jeddah`•Mian Haider Ali Shah from AKORA khattak•Ayaz Tariq from MK

Statement of Cash FlowStatement of Cash Flow• Provides information about cash inflows and outflows during

an accounting period.

• Focuses on Cash

• Three sections to the statement of cash Flows: 1. Cash flow from Operating Activities

2. Cash flow from Investing Activities

3. Cash flow from Financing Activities

Statement of Cash FlowStatement of Cash Flow

• While developing cash flow statement we need information from balance sheet and income statement

• All items are classified as either cash inflows or cash outflows

If an item represents a cash INFLOW

you ADD that item

If an item represents a cash OUTFLOW

you SUBTRACT that item

Statement of Cash FlowStatement of Cash Flow

• Remember: Cash is on the left hand side of the Balance Sheet

• Assets = Liabilities + Equity

• Most classifications (In/outflow) are easy An increase in gross fixed assets An increase of long-term debt

Cash inflow =Decrease in Assets or Increase in Liabilities or equity

Cash outflow =Increase in Assets or Decrease in Liabilities or equity

Methods of Preparing Cash Methods of Preparing Cash Flow StatementFlow Statement

There are two methods by which we can prepare cash flow statement:

•Direct Method

•Indirect Method

Direct Method:

•very simple and result is more easily understood•In this method you are analyzing or evaluating your cash and bank accounts to identify cash flow during the period.

Indirect Method:

•frequently used and most common method. •less expensive to use.•In this method you start with net income per the income statement, reverse out entries to income and expense accounts that do not involve a cash movement

Indirect vs DirectIndirect vs Direct• The main difference between the direct method

and the indirect method is involvement of the cash flows from operating activities.

• Under the direct method, the cash flows from operating activities will include the amounts for lines such as cash from customers and cash paid to suppliers.

• In contrast, the indirect method will show net income followed by the adjustments needed to convert the total net income to the cash amount from operating activities.

CF from Operating ActivitiesCF from Operating Activities

Start with the net profit (income) and “modify” until you get the

net cash flow

As Depreciation is non cash expense and we had subtracted it from the income statement so we will add it back in cash flow statement.

Net income from Income Statement (starting point)

+ Depreciation

Changes in Current Assets (Accounts receivable, Inventories)

changes in Current Liabilities (Accounts payable, Accruals)

= Net cash flow from operating activities

ExampleExampleNet Profit 50000Add Depreciation 8000 Decrease in a/c receivables 5000Less Decrease in a/c payables (2000) Loss on sale of asset (1000)Cash flow from operations 60000

Operating cash flows include:

•Receipts from the sale of goods or services•Receipts for the sale of loans, debt or equity instruments in a trading portfolio•Interest received on loans•Payments to suppliers for goods and services.•Payments to employees or on behalf of employees•Interest payments •Buying Merchandise

Items which are added back to [or subtracted from, as appropriate] the net income are:•Depreciation (loss of tangible asset value over time)•Deferred tax•Amortization (loss of intangible asset value over time)•Any gains or losses associated with the sale of a non-current asset, because associated cash flows do not belong in the operating section.(unrealized gains/losses are also added back from the income statement)•Dividends received•Revenue received from certain investing activities

CF from Investing CF from Investing ActivitiesActivities

Buying or selling productive long-lived assets such as plants and equipment

Zero (starting point)

Changes in Gross Fixed Assets

= Net cash flow from investing activities

ExampleExampleCash flow from operations

60000

Cash flow from investing activities Cash from sale of Mkt. Securities 5000 Cash advanced to borrowers (8000) Cash proceeds from sale of asset 13000 Cash flow from investing activities

70000

Investing activities include:

•Purchase or Sale of an asset (assets can be land, building, equipment, marketable securities, etc.)

•Loans made to suppliers or received from customers

CF from Investing CF from Investing ActivitiesActivities

• While preparing CF from Investing Activities we are looking for changes in Gross Fixed Assets, not Net Fixed Assets!

• What if Gross Fixed Assets are not reported in balance sheet?

Then we will first Calculate Dep. Then find out Gross fixed Assets

Depreciation (on the income statement) = Change in Accumulated Depreciation (on the balance sheet) Change in Gross Fixed Assets =

+ Change in Net Fixed Assets + Depreciation (on the income statement)

CF from Financing CF from Financing ActivitiesActivities

• Financing Activities This includes transactions related:

New loans (long-term, short-term debt)/Repayment of principal

Sale (issue) or repurchase of stock and Payment of dividends.

Zero (starting point)

Changes in Notes Payable, Current Portion of LT Debt, Long Term Debt, Common Stock

- Dividend Payout (= Net Income – Change in Retained Earnings)

= Net cash flow from financing activities

ExampleExampleCash flow from investing activities 70000

Cash flow from financing activities Proceeds from sale of shares 8000 Dividend paid (1000) Cash proceeds from N/P 12000 Net Cash flow 89000 Op cash 6000Closing cash 95000

Statement of Cash flows: Statement of Cash flows: Useful RelationUseful Relation

Net cash flow from Operating Activities + Net cash flow from Investing Activities

+ Net cash flow from Financing Activities________________________________

= CHANGE in the cash account (balance sheet)