who cares about a cash flow statement

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Definition of Cash: In preparing a statement of cash flows, the term cash is broadly defined to include both cash and cash equivalents . Cash equivalents consist of short term, highly liquid investments such as treasury bills, commercial paper, and money market funds that are made solely for the purpose of generating a return on temporary idle funds. Instead of simply holding cash, most companies invest their excess cash reserves in these types of interest bearing assets that can be easily converted into cash. These short term liquid investments are usually included in marketable securities on the balance sheet. Since such assets are equivalent to cash, they are included with cash in preparing a statement of cash flows The balance sheet is a snapshot of a firm's financial resources and obligations at a single point in time, and the income statement summarizes a firm's financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues. The cash flow statement includes only inflows and outflows of cash and cash equivalents; International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements. Cash flow activities The cash flow statement is partitioned into three segments, namely: 1)cash flow resulting from operating activities; 2)cash flow resulting from investing activities;and 3)cash flow resulting from financing activities. The money coming into the business is called cash inflow, and money going out from the business is called cash outflow. [edit ] Operating activities Operating activities include the production , sales and delivery of the company's product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising, and shipping the product. Under IAS 7, operating cash flows include: [11]

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Page 1: Who Cares About a Cash Flow Statement

Definition of Cash:

In preparing a statement of cash flows, the term cash is broadly defined to include both cash and cash equivalents. Cash equivalents consist of short term, highly liquid investments such as treasury bills, commercial paper, and money market funds that are made solely for the purpose of generating a return on temporary idle funds. Instead of simply holding cash, most companies invest their excess cash reserves in these types of interest bearing assets that can be easily converted into cash. These short term liquid investments are usually included in marketable securities on the balance sheet. Since such assets are equivalent to cash, they are included with cash in preparing a statement of cash flows

The balance sheet is a snapshot of a firm's financial resources and obligations at a single point in time, and the income statement summarizes a firm's financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues. The cash flow statement includes only inflows and outflows of cash and cash equivalents;

International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements.

Cash flow activities

The cash flow statement is partitioned into three segments, namely: 1)cash flow resulting from operating activities; 2)cash flow resulting from investing activities;and 3)cash flow resulting from financing activities.

The money coming into the business is called cash inflow, and money going out from the business is called cash outflow.

[edit] Operating activities

Operating activities include the production, sales and delivery of the company's product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising, and shipping the product.

Under IAS 7, operating cash flows include:[11]

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 Dividends received on equity securities Payments to suppliers for goods and services Payments to employees or on behalf of employees Interest payments (alternatively, this can be reported under financing activities in IAS 7, and US GAAP)

Items which are added back to [or subtracted from, as appropriate] the net income figure (which is found on the Income Statement) to arrive at cash flows from operations generally include:

Page 2: Who Cares About a Cash Flow Statement

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)

[edit] Investing activities

Examples of Investing activities are

Purchase or Sale of an asset (assets can be land, building, equipment, marketable securities, etc.) Loans made to suppliers or received from customers Payments related to mergers and acquisitions

[edit] Financing activities

Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement.

Under IAS 7,

Proceeds from issuing short-term or long-term debt Payments of dividends Payments for repurchase of company shares Repayment of debt principal, including capital leases For non-profit organizations, receipts of donor-restricted cash that is limited to long-term purposes

Items under the financing activities section include:

Dividends paid Sale or repurchase of the company's stock Net borrowings Payment of dividend tax

[edit] Disclosure of non-cash activities

Under IAS 7, non-cash investing and financing activities are disclosed in footnotes to the financial statements. Under US General Accepted Accounting Principles (GAAP), non-cash activities may be disclosed in a footnote or within the cash flow statement itself. Non-cash financing activities may include[11]

Leasing to purchase an asset Converting debt to equity Exchanging non-cash assets or liabilities for other non-cash assets or liabilities Issuing shares in exchange for assets

Page 3: Who Cares About a Cash Flow Statement

Who cares about a Cash Flow Statement? • Executives want to know if the cash generated by the company will be sufficient to

fund their expansion strategy • Stockholders want to know if the firm is generating enough cash to pay dividends • Suppliers want to know if their customers will be able to pay if offered credit • Investors want to evaluate future growth potential • Employees are interested in the overall viability of their employer as indicated by its

ability to fund its operations

Format of the Cash Flow Statement • The cash flow statement is divided into three sections:

o Cash flow from operating activities: shows the results of cash inflows and outflows related to the fundamental operations of the basic line or lines of business in which the company engages. (Example: cash receipts from the sale of goods or services and cash outflows for purchasing inventory and paying rent and taxes.)

o Cash flow from investing activities: associated with purchases and sales of non-current assets (Example: building and equipment purchases or sales of investments or subsidiaries.)

o Cash flow from financing activities: associated with financing the firm (Example: selling and paying off bonds and issuing stock and paying dividends)

Statement of Cash Flows Cash Flow from Operating Activities Net Income XXX,XXX Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization XX,XXX Changes in other accounts affecting operations: (Increase)/decrease in accounts receivable X,XXX (Increase)/decrease in inventories X,XXX (Increase)/decrease in prepaid expenses X,XXX Increase/(decrease) in accounts payable X,XXX Increase/(decrease) in taxes payable/ deffered tax X,XXX Net cash provided by operating activities Interest ExpenseLess: Interst Paid XXX,XXX Cash Flow from Investing Activities Interest Received Dividend receivedCapital expenditures (XXX,XXX) Proceeds from sales of equipment XX,XXX Proceeds from sales of investments XX,XXX Investments in subsidiary (XXX,XXX) Net cash provided by investing activities (XXX,XXX) Cash Flow from Financing Activities Payments of long-term debt (XX,XXX) Proceeds from issuance of long-term debt XX,XXX Proceeds from issuance of common stock XXX,XXX

Page 4: Who Cares About a Cash Flow Statement

Dividends paid (XX,XXX) Purchase of treasury stock (XX,XXX) Net cash provided by financing activities (XX,XXX) Increase (Decrease) in Cash XX,XXX

Page 5: Who Cares About a Cash Flow Statement

The statement of cash flows can be used to answer crucial questions such as the following:

1. Is the company generating sufficient positive cash flows from its ongoing operations to remain viable?

2. Will the company be able to repay its debts? 3. Will the company be able to pay its usual dividends? 4. Why is there a difference between net income and net cash flow for the year? 5. To what extent will the company have to borrow money in order to make needed investments?