STATEMENT OF CASH FLOW

1
Session 05

• STATEMENT OF CASH FLOW
• Cash based vs Accrual based
• Cash-flow analysis

2
STATEMENT OF CASH FLOW

• Provides financial information from the CASH
  BASIS perspective.
• Represents also a movie between two moments in
  time, just like the INCOME STATEMENT.
• If the INCOME STATEMENT is a zoom on an EQUITY
  account, the STATEMENT OF CASH FLOW is a zoom on
  the CASH AND EQUIVALENTS account.
• Connects BALANCE SHEET AND INCOME STATEMENT.
  (cash flow example)

3
STATEMENT OF CASH FLOW

• You can look at the STATEMENT OF CASH FLOW from
  two different perspectives
• Reconciliation between NET INCOME and CASH FLOW
  (see BMW).
• Schedule of Cash Receipts and Disbursements (see
  BRISA).

4
STATEMENT OF CASH FLOW

• Cash flows are critical in assessing a companys
  liquidity and creditworthiness.
• The cash flow statement provides a detailed
  summary of the cash inflows and outflows that are
  derived from a companys three primary activities
  
• Operations
• Investing
• Financing

5
Cash Flow from operations

• This is the most relevant of the cash flows! This
  should be the main provider of cash for the
  firms investments and even financing activities.
  This one should be positive the other 2 should be
  negative!

6
Cash Flow from operations

• Cash receipts from customers
• Receipts due to Sales of products or services
  rendered
• Problem not all sales are paid in the same
  period, not all receipts refer to sales made in
  the same period.
• Additional problem VAT, Sales Tax!

7
Cash Flow from operations

• Cash payments to suppliers
• Payments are made to suppliers for purchases
  made.
• Problem not all purchases are paid for in the
  same period...
• Problem not all purchased goods are sold (why is
  this important again?) in the same period...

8
Cash Flow from operations

• Cash payments to employees
• This is easier, since you do not accumulate
  inventories of labour, but you still need to
  consider the salaries payables change.
• Other operating payments.

9
Cash Flow from investing activities

• This area of the statement includes the
  activities that assure the sustainable growth of
  the firm. One expects the firm to keep growing
  and in order to do so, it needs to invest
  continuously. Therefore, this cash flow is
  expected to be negative and absorb a substantial
  part of the cash flow generated in operations.

10
Cash Flow from investing activities

• Cash receipts from alienating assets, securities,
  financial investments,...
• Cash disbursements in the acquisition of assets,
  securities, financial investments,...

11
Cash Flow from financing activities

• This part of the statement should be residual,
  but it rarely is. Ideally, the firm would
  generate sufficient cash in operations to afford
  a healthy investment policy and still have funds
  to repay to the debt or share owners .
• On the other hand, this approach would limit
  growth in most cases, as the firms never generate
  enough cash from operations to sustain large
  investments.
• In the event of such larger investments, this
  cash flow becomes positive.

12
Cash Flow from financing activities

• Cash receipts from
• contracting bank loans,
• issuing stock,
• getting subsidies...
• Cash disbursements
• repaying debt principal,
• buying own stock (own shares),
• distributing divididends,
• paying interest (operating?).