Scribd
Upload
32 views6 pages

Cash Flow Statement

The document discusses the cash flow statement and its purpose of detailing cash flows from operating, investing, and financing activities. It explains the direct and indirect methods for presenting cash flows from operating activities and provides an example cash flow statement with analysis of changes in specific balance sheet items.

Uploaded by

Martina
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
32 views6 pages

Cash Flow Statement

The document discusses the cash flow statement and its purpose of detailing cash flows from operating, investing, and financing activities. It explains the direct and indirect methods for presenting cash flows from operating activities and provides an example cash flow statement with analysis of changes in specific balance sheet items.

Uploaded by

Martina
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 6

CASH FLOW STATEMENT

An introduction: operating, investing, and financing activities


- Overview
o The purpose of the statement of cash flows is to:
 Detail the changes in the cash account on the balance sheet (change
in cash between one BS and the next one, analyzing the transactions
impacting cash)
 Report cash receipts / payments of an entity over a period of time >
demonstrate the difference between beginning and ending cash
 Classify the cash flows as operating, investing, and financing activities
o The term “cash” also refers to cash equivalents
o Cash equivalents are highly liquid short-term investments that a company can
easily and quickly convert into cash (an investment that has a short maturity -
three months or less from the date of acquisition)
 Example: listed treasury / corporate bonds very close to the
reimbursement date
- Purpose of the cash flow statement

o Helps to predict future cash flows (...how to evaluate a company by using the
Discounted Cash Flow Method)
o Evaluates how management generates and uses cash (specifically, the “cash”
profitability of business units)
o Determines a company’s ability to pay interest, dividends, and debts when
they are due (solvency)
o Identifies specific increases and decreases in a firm’s productive assets
(investments and disinvestments)
- Managers affect cash (absorb/create) by 3 types of decisions: operating, investing,
and financing
1. Operating decisions
o Concerned with the major day-to-day activities that generate revenues and
expenses
o = transactions that affect the purchase, processing, and selling of a company’s
products and services
 Making sales > collecting accounts receivable
 Purchasing materials, services and labour > paying payables to
suppliers and employees
 Payment of interest expenses and income taxes
o The first major section of the statement of cash flows is labeled cash flows
from operating activities
2. Investing decisions
o They include the choices to acquire or dispose of long-term productive assets
(tangible/intangible assets or financial investments)
o = transactions that acquire or dispose of assets that are expected to provide
services for more than one year
 Purchasing (uses) or disposing (sources) of tangible / intangible assets
and financial asset
3. Financing decisions
o They are concerned with how to obtain or repay cash
o = transactions that obtain resources from debt and equity transactions
 Issuance of additional stock (source)
 Borrowing money from the bank (source)
 Repaying previous loans (use)
- Typical activities affecting cash

o Need to analyze the dynamic of cash to understand where it’s coming from:
might have cash just because you are divesting or borrowing a lot of money –
it’s important to generate cash from the core activity of the business

Cash flow from operating activities


- Two approaches might be used to present the cash flow from operating activities:
1. Direct method
o Subtracts operating cash disbursements from operating cash collections
2. Indirect method
o Adjusts accrual-based net income from the income statement to reflect only
cash receipts and disbursements
 Accrual-based accounting: recognize revenues and expenses when
they are generated—not when money actually changes hands
o Is used by most listed companies
- The indirect method
o +/- net income
1. -/+ Adjust for non-cash revenues (-) and expenses (+) not requiring cash
 Add back depreciation
 Other adjustments (e.g. impairment, revaluation etc…)
2. -/+ Adjust for changes in classification of revenues (-) /costs (+) that are
not related to the “operating activities” section of the CFS but are related
to the “investing activities” and/or “financing activities” sections
 Mandatory: classification of gains (-) / losses (+) from sale of assets
from “operating” to “investing”
 Optional: classification of interest expense (+) from “operating” to
“financing”, classification of financial income (-) from “operating” to
“investing”
3. +/- Adjust for changes in noncash assets and liabilities relating to
operating activities

o = cash flow from operating activities

An example: operating, investing, and financing decisions


- Introduction of the case

-
-
-
-
-
-
-
-
The change of the BS items must be assigned to one of the 3 CFS sections: OP, IA,
and FA
o Change in cash of
+22000 must be equal
to their sums
- Cash flow from operating activities
- Cash flow from investing activities

- Cash flow from financing activities


- Cash flow statement full format

You might also like