Cash flow statement & Break Even Analysis

• A statement of cash flows is a financial statement which summarizes cash transactions of a business during a given accounting period.

• It shows how cash moved during the period by indicating whether a particular line item is a cash in-flow or a cash out-flow.

• The term cash as used in the statement of cash flows refers to both cash and cash equivalents.

• Cash flow statement provides relevant information in assessing a company's liquidity, quality of earnings and solvency.

Sections:

As stated above, a statement of cash flows comprises of three sections:

• Cash Flows from Operating Activities: This section includes cash flows from the principal revenue generation activities such as sale and purchase of goods and services. Cash flows from operating activities can be computed using two methods.

• Cash Flows from Investing Activities: These are cash in-flows and out-flows related to activities that are intended to generate income and cash flows in future. This includes cash in-flows and out-flows from sale and purchase of long term assets.

• Cash Flows from Financing Activities: These are the cash flows related to transactions with stockholders and creditors such as issuance of share capital, purchase of treasury stock, dividend payments etc.

SO 2 Distinguish among operating, investing, and financing activities.

Classification of Cash Flows

Company A Inc.

Cash Flow Statement

For the the year ended ……..

PARTICULARS AMOUNT AMOUNT

CASH FLOW FROM OPERATING ACTIVITIES

operating income (EBIT) XXX

depriciation Expense XXX

loss on sale of equipment XXX

gain on sale of land (-)XXX

increase in accounts receivables (-)XXX

decrease in prepaid expenses XXX

decrease in accounts payable (-)XXX

decrease in accrued expenses (-)XXX

NET CASH FLOW FROM OPERATING ACTIVITIES XXX 1

CASH FLOW FROM INVESTING ACTIVITIES

sale of equipment XXX

sale of land XXX

purcahse of equipment (-)XXX

NET CASH FLOW FROM INVESTING ACTIVITIES XXX2

CASH FLOW FROM FINANCING ACTIVITIES

payment of dividends (-)XXX

payment of bond payable (-)XXX

NET CASH FLOW FROM FINANCING ACTIVITIES XXX3

(XXX1 + XXX2 + XXX3)NET CHANGE IN CASH XXX4

BEGINNING CASH BALANCE XXX5

ENDING CASH BALANCE XXX6

BREAK EVEN ANALYSIS

• Break Even Analysis is a useful technique for determining how many units must be sold or how much sales volume must be achieved in order to break even

• The break even sales point indicates to the entrepreneur the volume of sales needed to cover total variable and fixed expenses

• Sales in exceed of the break-even point will result in a profit as long as the selling price remains above the costs necessary to produce each unit (variable cost)

TFCBREAK EVEN B/E (Q) = -------------------------------------------- SP-VC / UNIT (marginal contribution)

• The major weakness in calculating the break even lies in determining whether a cost is fixed or variable

• However, it is reasonable to expect such costs as depreciation, salaries and wages, rent and insurance to be fixed.

• Materials, selling expenses such as commissions, and direct labor are most likely to be variable costs

• The variable cost per unit can usually be determined by allocating the direct labor, materials and other expenses that are incurred with the production of a single unit

EXAMPLE• If we determine that the firm has fixed costs of

$250000, variable cost per unit of $4.50, and selling price of $10.00, the break even will be:

TFC B/E = ---------------------------------- SP - VC per unit

$ 250000 = ------------------------- $ 10.00 - $4.50 per unit

250000 = ---------------- = 45,454 units 5.50

• Any units before 45,454 that are sold by the above firm will result in a profit of $ 5.50 per unit. Sales below 45,454 units will result in a loss to firm.

• The unique aspect of break even is that it can be graphically displayed. In addition, entrepreneur can try different states of nature (e.g. different selling prices, different fixed costs and/or variable costs) to ascertain the impact on break even and subsequent profits.

B/E

TR AT $10

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