The Cash Flow Statement

Lecture 3

This lecture is part of Chapter 1:The Basic Financial Statements

Today’s Lecture

Understand the elements of the Cash Flow Statement

Make a simple Cash Flow Statement with MS Excel

Where does it go??

Cash Flow

Where does it go?

Help!?

?In daily life, we all know the experience .. Where did the money go? It’s good to know!In business it’s essential to know!

Holiday ..

Cash Flow Statement

The Cash Flow Statement is the third of the three basic financial statements. It is closely related to matters concerning the daily operation of a company.

The Cash Flow Statement shows where the money goes (out-flows) and where it comes from (in-flows) during a certain period of time.

It also shows the net in- or out-flow during that period of time. This is an extremely important number in the financial management of a company!

Cash Flow Statement

One way to look at the difference between the three basic financial statements.

While the Balance Sheet shows cash balances and the Income Statement where the money comes from or goes to, the Cash Flow Statement shows why cash increased or deceased.

Cash Flow Statement

In other words:

+ Beginning Cash Balance

- Cash Out-Flows (Uses)

+ Cash In-Flows (Sources)

= Ending Cash Balance

Cash Flow Statement

The Cash Flow Statement is usually divided into three sections:

• Cash Flows from OperationsThese are the cash flows generated by the daily running of thebusiness. E.g. the buying and selling of goods.

• Cash Flows from InvestmentsUsually, with investments one means here fixed assets like

plantand equipment.

• Cash Flows from FinancingLoans play an important part in most businesses. Here,

mainly, thecash flows related to the repayment of loans or the taking up

of newloans are listed. This item could also e.g. contain the cash flows from issuing

stock.

A Simple Cash Flow StatementA B C D E F G

23 Ever Profit International4 Cash Flow Statement for the Year ended Dec 31, 199956 Cash Flows from Operations7 Receipts8 Interest received from Investment 2009 Payments from Customers 1200010 Others 34011 Disbursements12 To suppliers -480013 To employees -500014 Others -20015 Net Cash Flow from Op. Activites 2540 =Sum(G7:G14)16 Cash Flows from Investing Activities17 Purchase of Equipment -600018 Sale of Equipment 100019 Net Cash Flow from Inv. Activities -5000 =SUM(G17:G18)20 Cash Flows from Financing Activities21 Taking up of a long term loan 1200022 Payment of Dividends to Share Holders -50023 Net Cash Flow from Fin. Activities 11500 =Sum(G21:G22)24 Net change in Cash Balance 9040 =G15+G19+G23

Let’s first clean this up a bit …

and then look at it in more detail …

Incomprehensible!!!

But difficult??

A Simple Cash Flow Statement3456 Cash Flows from Operations7 Receipts8 Interest received from Investment 2009 Payments from Customers 1200010 Others 34011 Disbursements12 To suppliers -480013 To employees -500014 Others -20015 Net Cash Flow from Op. Activites 2540 =Sum(G7:G14)16 Cash Flows from Investing Activities17 Purchase of Equipment -600018 Sale of Equipment 100019 Net Cash Flow from Inv. Activities -5000 =SUM(G17:G18)20 Cash Flows from Financing Activities21 Taking up of a long term loan 1200022 Payment of Dividends to Share Holders -50023 Net Cash Flow from Fin. Activities 11500 =Sum(G21:G22)24 Net change in Cash Balance 9040 =G15+G19+G23

Ever Profit InternationalCash Flow Statement for the Year ended Dec 31, 1999 Use the

Center and Merge Button

Change the Font

Make the total bold

Underline before the subtotals

Make the main items italic

Some Notes

Many accountants compute the amounts for the Cash Flow Statement by using the Income Statement and the changes in the related Balance Sheet accounts.

This is often called the T-account approach. Of course this only works if the relevant information is actually listed in the Income Statement and Balance sheet.

Let us have a look at the items in the cash flow statement one by one.

Elements of a Cash Flow Statement

Cash Flows from Operations

Receipts Here the most important receipts from daily operations for thebusiness are listed. It is important to realize that the choice of whatto list and what not is dependent on the nature of the company.

DisbursementsHere the most important disbursements necessary for the dailyoperations are listed. Again, the choice of what to list and what notdepends on the nature of the company.

Elements of a Cash Flow Statement

Cash Flows from Investing Activities

Purchase of Equipment Most businesses cannot operate without some kind of investment.In order to get (and keep) a company running, it needs to buy certain equipment like e.g. computers and tools. Usually, suchitems can be used for many years which is why they are not listedunder Cash Flow from Operations but separately.

Sale of EquipmentOf course one can also sell equipment previously bought. E.g. whenone wants to upgrade or when one no longer wants it. Think ofSingapore Airlines always wanting to have a nice new fleet. What todo with those old planes? One option is to sell them.

Elements of a Cash Flow Statement

Cash Flows from Financing Activities

Long Term Loan Knowing when and where to borrow money is an important aspectof management. If you borrow at the wrong moment at the wrongplace you might end up in trouble. (Think Asian Crisis). On theother hand, if you have a great idea and give up on it due to lack offunds you might loose a fantastic opportunity.Since cash inflows (or outflows) due to loans are not part of dailyoperations, they are listed separately here.

Payment of DividendsOf course the idea of ‘investing’ in a company as a shareholder isto get more money back than one puts in. Some companies return apart of their profits to the shareholders as dividends as a kind ofinterest on their shares (note: this is usually a rather small amount).

Elements of a Cash Flow Statement

Net Change in Cash Balance

The net change in cash balance is an important indicator for how well the company will be able to continue doing business.

If the net change is strongly negative and the company has little or no cash left, it will almost certainly need new loans. It is good to know that one needs to plan for that.

On the other hand if the cash flow is positive and there are little debts, extra cash for new investments or for dividends will be available.

Now let us look at how we can actually obtain some of the items from the Balance Sheet and the Income Statement.

Cash Flow from Operating Activities

Receipts

Disbursements

Generating the Statement

Payments from Customers

= Sales - Change in Accounts Receivable

To Suppliers = Cost of Goods sold + Change in Inventory – Change in Accounts

Payable (for Inventory)

Key Points of the Day

The Cash Flow Statement provides important information regarding the cash requirements of a company.

(Parts of) the Cash Flow Statement can be derived from the Balance Sheet and the Income Statement by analyzing changes.