Cash - Flow Analysis Model PDF
Cash - Flow Analysis Model PDF
Cash - Flow Analysis Model PDF
net/publication/242118880
Article
CITATIONS READS
0 389
4 authors:
Some of the authors of this publication are also working on these related projects:
All content following this page was uploaded by Borlea Sorin on 09 May 2014.
Abstract. In the paper the authors show a new method of computing and a system of indicators in order to
analyze the cash-flow statement of a company.
Key words: cash-flow, current assets, debts, current liabilities
1. Introduction
The cash flow statement is made by analyzing the effects of each transaction on cash. Because of the large
number of transactions made by a company and registered in accounting, even for a short period of time,
this procedure is seldom used. However, the statement of cash-flow is usually made by comparing the
values from the balance sheet for the beginning of the year and end of the year and analyzing the changes
in monetary assets account that occurred during that period.
Shareholders’
86 545 935 123 204 887 36 658 952 150 607 746 27 402 859 146 207 167 -4 400 579
equity
Short term debts 67 486 896 61 361 149 -6 125 747 105 624 076 44 262 927 129 975 666 24 351 590
Long term debts 29 730 177 28 603 328 -1 126 849 33 712 286 5 108 958 29 594 985 -4 117 301
Circulating assets
+ advance 46 989 157 62 864 017 15 874 860 103 130 449 40 266 432 120 732 335 17 601 886
payments
Non current
130 191 372 146 704 676 16 513 304 180 674 661 33 969 985 179 735 454 - 939 207
assets
65
Cash flow per share
Since 1973, the Commission for Securities and Exchange from USA has forbidden companies the reporting
to the number of shares of cash flows. The committee believes that the investors accustomed to the data
supplied according to earning per share, could be mislead to considering the cash blows based on shares as
a measure of the companies welfare. Today, the position of FASB is the following: the reporting of cash
flows per shares will incorrectly indicate the fact that cash flows, or one of its components, equals or is
even higher then earnings as indicator of the performance or alternative of earnings per share.32
Limits of indicator "cash flow per share". The high concern of market analysts and investors with the
cash flow per share does not imply the fact that this replaces profit in measuring the performance of a
company. Both of them are important for financial analysis and their importance depend on certain
circumstances. As previously noticed, the cash flow generated by operational activities excludes, in the
case of the direct method, amortization and the transactions made but not cashed or paid. As a result, the
harmonization of expenditures and incomes made according to the traditional method (which uses as
starting point in earnings forecast) can not be found in the calculation of cash flows. Many companies
obtain, during certain time intervals, negative cash flows that are not necessarily important in the future.
High tech companies such as IBM or XEROX usually have, during the first years of activity, negative cash
flows (caused by the intensive research and development expenses) that are not relevant for the future cash
flows generated by operations.
In the case of SC FELEAC S.A., there can be noticed negative values of the indicator in 2003 and 2005
and positive values in 2004.
Cash flows from operational activities as percent from the total cash flows
When a significant part of the cash flow derives from other sources then operational activities (share
issuing, long term debts or non current assets sale), the liquidity of the company is doubtful. Thus, a low
percent of the cash flow resulting from operational activities usually signals a serious financial crisis. In
fact, in 2003 and 2004, SC FELEAC SA the recorded negative levels of the indicator were close to
triggering company’s bankruptcy.
Cash flows from operational activities as percent from long term debts
The cash flows from operational activities as percent from long term debts is usually called covering debts.
It is a key indicator of liquidity used in appreciating shares and long term bank loans and shows the
necessary time interval in which current cash from operational activities should cover long term debts. The
balance sheet of SC FELEAC SA shows on the 31st of December 2003 long term debts of 29.7 million
Ron, while the cash generated from operational activities was of 10.9 million RON. As a result, the
required period of time for covering the debt was 2 years and 7 months. In 2004, the required period of
time for covering the debts was 6 years and 2 months, and in 2005 the period of time for covering the debts
was 2 years.
3. Conclusions
Cash flow statement is a report in order to help foreseeing the company’s capacity to sustain (or to
increase) the cash from current operations. For this purpose, the statement provides several objective
information ob:
32
The plan of exposing the statements proposed by FASB, „Cash Flow Statement”
66
− the capacity of a company to generate cash flows from the operational activities;
− tendencies in the components of cash flows and the investment and financing decisions
consequences over cash;
− Management’s decisions regarding the critical areas as well as the financial policy, dividend
policy and investments for obtaining the economic growth of the company.
Both cash flow statement and profit and loss account alone contain enough information in the process of
decision making. The data from the profit and loss account and from the balance sheet have to be combined
with cash flows in order to create a profound analysis of the company’s capacity of investing in assets
basing on reported profits and of paying the debts resulting from the engaged expenses and, thus, to help
the analyst in introducing other relevant evaluation measures.
The data contained in cash flow statement may be used for:
− Over viewing the individual elements of cash flows for the analytical significance of cash
movements;
− Examining the tendency of different cash flow components in time and their relation to
elements corresponding to the profit and loss account;
− Considering in time the relation between cash flow components;
Generally speaking, cash flows from operational activities should be positive and to increase over time,
since they provide resources for covering debts, for investing in assets and for remunerating shareholders.
Even if the profit and loss account and the balance sheet are imposed as parts of financial statements, cash
flow statement is not required in many countries.
Cash flow analysis represents, in our opinion, an important instrument for international comparisons, due
to the significant accounting differenced among countries. Cash flows are less susceptible then profit to
variations resulting from the differences in accounting methods. Nevertheless, the differences in
accounting methods influence the classification of cash flows. Thus, comparison on international scale
requires the adjustment of reported cash flows.
Bibliography
1. Btrâncea I. - Financial Reports, Risoprint Publishing, Cluj-Napoca, 2006
2. Btrâncea I., Dumbrav P., Btrâncea L.M. - Balance Sheet of Economic Entity, Alma Mater
Publishing, Cluj-Napoca, 2006
3. Bue L. - Financial Analysis, Economica Publishing, Bucharest, 2005
4. Gheorghiu Al. - Financial Analysis, Economica Publishing, Bucharest, 2004
5. Hackel, Kenneth S. and Joshua Livnat - Cash Flow and Security Analysis. Burr Ridge, III.:
Business One Irwin, 1992
6. Hackel, Kenneth S. and Joshua Livnat - Cash flow and Security Analysis, Burr Ridge III:
Business One Irwin, 2002
7. Helfert - Techniques of Financial Analysis: A Modern Approach, Ninth Edition, 2003
8. Johnson, H. Thomas and Robert S. Kaplan - Relevance Lost: The Rise and Fall of
Management Accounting. Boston: Harvard Business School Press, 1987
67