CASH FLOW STATEMENT

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CASH FLOW STATEMENT:

CASH FLOW STATEMENT

WHAT’S A CASH FLOW:

WHAT’S A CASH FLOW Cash flow (also called net cash flow ) is the balance of the amounts of cash being received and paid by a business during a defined period of time, sometimes tied to a specific project.

USES OF THE CASH FLOW STATEMENT:

USES OF THE CASH FLOW STATEMENT Measurement of cash flow can be used: To evaluate the state or performance of a business or project. To determine problems with liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash, even while profitable. To generate project rate of returns. The time of cash flows into and out of projects are used as inputs to financial models such as internal rate of return, and net present value. To examine income or growth of a business when it is believed that accrual accounting concepts do not represent economic realities. Alternately, cash flow can be used to 'validate' the net income generated by accrual accounting.

CLASSIFICATION:

CLASSIFICATION Cash flows can be classified into: Operational cash flows : Cash received or expended as a result of the company's core business activities. Investment cash flows : Cash received or expended through capital expenditure, investments or acquisitions. Financing cash flows : Cash received or expended as a result of financial activities, such as interests and dividends.

OPERATIONAL CASH FLOW:

OPERATIONAL CASH FLOW

OPERATIONAL CASH FLOW:

OPERATIONAL CASH FLOW Cash flow provided by operations or cash flow from operating activities, refers to the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investment in securities. To calculate cash generated from operations, one must calculate cash generated from customers and cash paid to suppliers. The difference between the two reflects cash generated from operations

OPERATING CASH FLOW:

OPERATING CASH FLOW Cash generated from customers: -revenue as reported - increase (decrease) in trade receivables - investment income (disclosed separately). - other income that is non cash and non sales related. Cash paid to suppliers: costs of sales + other expenses as reported less - increase (decrease) in trade payables - non cash items such as depreciation, provisioning, impairments, bad debts, etc. - financing expenses

CASH FLOW FROM INVESTING ACTIVITIES:

CASH FLOW FROM INVESTING ACTIVITIES

CASH FLOW FROM INVESTING ACTIVITIES:

CASH FLOW FROM INVESTING ACTIVITIES This number shows how much money the company has received (or lost) from its investing activities. It includes money that the company has made (or lost) by investing its excess cash in different investments (stocks, bonds, etc), money the company has made (or lost) from buying or selling subsidiaries, and all the money the company has spent on its physical property, such as plants and equipment.

CASH FLOW FROM INVESTING ACTIVITIES:

CASH FLOW FROM INVESTING ACTIVITIES Cash Flows From Investing Activities: (+) Proceeds From Sale Of Assets (-) Purchases Of Property And Equipment (=) Total Net Cash Provided (used) By Investing Activities For a given period, you may not have much in the way of investing activities. But over time, it is an important consideration for assessing how you have chosen to use the cash generated by your business.

CASH FROM FINANCING ACTIVITIES:

CASH FROM FINANCING ACTIVITIES

CASH FROM FINANCING ACTIVITIES:

CASH FROM FINANCING ACTIVITIES Financing activities on a cash flow statement reflect borrowing money and repaying money, issuing stock, and paying dividends. The financing activities section of the cash flow statement can be reduced to the following formula: Cash received from issues of debt and capital stock Cash pd for divid . & re- acqu . of debt & cap. Stock =Cash Flow From Financing Activities

CASH FROM FINANCING ACTIVITIES:

CASH FROM FINANCING ACTIVITIES For a small business, the financing activities section of a cash flow statement usually reports the following information: (+) Net Borrowing Under Line Of Credit Agreement (+) Proceeds From New Borrowings (-) Repayment Of Loans (-) Principal Payments Under Capital Lease Obligations (-) Dividends/distributions/withdrawals Paid (+) Proceeds From Issuance Of Stock (+) Partner/owner Capital Contributions (=) Total Net Cash Provided (used) By Financing Activities

PREPARATION METHODS:

PREPARATION METHODS

DIRECT METHOD:

DIRECT METHOD Direct Method : it reports the source of cash inflows and outflows directly, without the potentially confusing adjustments to net income. Instead of starting with a reported net income, the direct method analyzes the various types of operating activities and calculates the total cash flow created by each one. Before beginning the direct method, all accrual accounts must first be converted to a cash figure.

INDIRECT METHOD:

INDIRECT METHOD Popular because of its relative simplicity, the indirect method has you start with a figure for net income (from your income statement) and helps you adjust this accrual amount for any items that do not affect cash flows. There are three basic types of adjustments: Revenues and expenses that do not involve cash inflows or outflows (e.g., cost allocations such as depreciation and amortization) Gains and losses on events reported in other sections of the statement of cash flows Conversions of current operating assets and liabilities from the accrual to the cash basis

INDIRECT METHOD RULES:

INDIRECT METHOD RULES The following rules are used to make adjustments for changes in current assets and liabilities, operating items not providing or using cash and non operating items. Decrease in noncash current assets are added to net income Increase in noncash current asset are subtracted from net income Increase in current liabilities are added to net income Decrease in current liabilities are subtracted from net income Expenses with no cash outflows are added back to net income Revenues with no cash inflows are subtracted from net income (depreciation expense is the only operating item that has no effect on cash flows in the period) Non operating losses are added back to net income Non operating gains are subtracted from net income

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