MSL

CASH FLOW ANALYSIS Cash • Sale of goods/services;

Inflows • interest income received
→ A detailed study of the net change in on loans,
cash as a result of operating, investing, • dividend income received
and financing activities during the on equity securities
period. Cash • Payment to suppliers;
Outflows • salaries and wages paid to
employees,
STATEMENT OF CASH FLOWS • taxes paid to the
government,
→ The basic financial statement prepared • interest expense paid to
and used in analyzing cash flows. creditors,
→ It reports the cash receipts, cash • payments of other
payments, and net changes in cash expenses
resulting from operating, investing, and
financing activities of the firm during the
2. Investing Activities – generally relate to
period.
changes in non-current assets.

Cash • sale of property, plant, and

CASH FLOWS – include cash and cash Inflows equipment
equivalents • sale of debt or equity
securities of other firm
• collection of principal on
loans
CASH EQUIVALENTS – short-term, highly
Cash • purchase of property,
liquid investments that are:
Outflows plant, and equipment
✓ readily convertible to known amounts of • purchase of debt or equity
cash securities of other firm
✓ so near their maturity date that their • lending of money to other
market value is relatively insensitive in firms
interest rates.
3. Financing Activities – relate to changes in
long-term liabilities and stockholders’ equity
FINANCIAL LIQUIDITY – refers to the accounts
“measure of cash” of assets and liabilities
Cash • sale of company’s own
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑪𝒂𝒔𝒉 𝑫𝒆𝒃𝒕 𝑪𝒐𝒗𝒆𝒓𝒂𝒈𝒆 𝑹𝒂𝒕𝒊𝒐 Inflows stocks
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑪𝒂𝒔𝒉 𝑭𝑳𝒐𝒘 • issuance of bond or notes
=
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 Cash • payment of dividends to
Outflows stockholders
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 • redemption of long-term
𝑩𝒆𝒈. 𝑪𝑳 + 𝑬𝒏𝒅. 𝑪𝑳 debt
=
𝟐 • reacquisition of capital
stock

FINANCIAL FLEXIBILITY – refers to a

company’s ability to respond and adapt to INFLOWS AND OUTFLOWS OF CASH
financial adversity an unexpected need and Inflows (sources) Outflows (uses)
opportunities Decrease in any Increase in any asset
asset
𝑪𝒂𝒔𝒉 𝑫𝒆𝒃𝒕 𝑪𝒐𝒗𝒆𝒓𝒂𝒈𝒆 𝑹𝒂𝒕𝒊𝒐
𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑪𝒂𝒔𝒉 𝑭𝒍𝒐𝒘 Increase in any Decrease in any
= liability liability
𝑻𝒐𝒕𝒂𝒍 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 Net profits after taxes Net loss after taxes
Depreciation and Dividends paid
other noncash
CLASSIFICATION OF CASH FLOWS changes
Sales of stock Repurchase and
1. Operating Activities
retirement of stock
→ cash effects of transactions that create
revenues and expenses. SIGNIFICANT NON-CASH ACTIVITIES
→ Generally relate to changes in current
assets and current liabilities. → these are not reported in the body of the
Statement of Cash Flows.
MSL

→ These are reported as a separate Net cash from operating activities xx

schedule at the bottom of the Statement Net cash from financing activities xx
Net cash from financing activities xx
of Cash Flows or in a separate note or Net cash used/provided xx
supplementary schedule to the financial
statements.
2. INDIRECT METHOD
FORMAT OF THE STATEMENT OF CASH
FLOWS Net income after tax xx
Tax expense xx
NAME OF THE COMPANY Net income before tax xx
Statement of Cash Flows Non deductible expenses xx
Period Covered Loss on sale xx
Gain on sale (xx)
Operating income before working capital changes xx
Cash flows from operating activities: Decrease in noncash current assets xx
List of individual items xx Increase in noncash current assets (xx)
Net cash provided (used) by operating Increase in trade current liabilities xx
activities xx Decrease in trade current liabilities (xx)
Cash generated from operations xx
Cash flows from investing activities: Income tax paid (xx)
List of individual items xx Interest paid (xx)
Net cash provided (used) by investing Net cash from operating activities xx
activities xx
FREE CASH FLOW
Cash flows from financing activities:
List of individual items xx OPERATING CASH FLOW (OCF)
Net cash provided (used) by financing
activities xx → The cash flow it generates from its
Net increase (decrease in cash xx normal operations – producing and
Cash balance, beginning of period xx selling its output of goods or services.
Cash balance, end of period xx
𝑂𝐶𝐹 = 𝑁𝑂𝑃𝐴𝑇 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 + 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛

BASIC APPROACHES AND PROCEDURES → NOPAT – Net Operating Profit After Tax
IN PREPARING STATEMENT OF CASH
𝑁𝑂𝑃𝐴𝑇 = 𝐸𝐵𝐼𝑇 × (1 − 𝑇%)
FLOWS
→ EBIT – Earnings Before Interest and
1. DIRECT METHOD
Taxes
→ Presents details or itemizes the major
FREE CASH FLOW (FCF)
classes of gross cash receipts and
payments → The amount of cash flow available to
→ The cash receipts are listed one by one, investors (creditors and owners) after
and the difference is the net cash flow the firm has met all operating needs and
from operations paid for investments in net fixed assets
→ Applicable in computing for the net and net current assets.
cashflows under operating, investing,
𝐹𝐶𝐹 = 𝑂𝐶𝐹 − 𝑁𝐹𝐴𝐼 − 𝑁𝐶𝐴𝐼
and financing activities
Collection from customers xx → NFAI – Net Fixed Asset Investment
Collection from other revenues under operating xx → NCAI – Net Current Asset Investment
Payment to trade creditors (xx)
Payment to other expenses under operating (xx) 𝑁𝐹𝐴𝐼 = 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑁𝑒𝑡 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 +
Cash generated from operations xx 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
Income taxes paid (xx)
Net cash from operating activities xx 𝑁𝐶𝐴𝐼 = 𝑁𝑒𝑡 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡 −
(𝑁𝑒𝑡 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐴𝑃 𝑎𝑛𝑑 𝐴𝑐𝑐𝑟𝑢𝑒𝑑 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠)
Sale of property, plant, and equipment xx
Sale of long-term investment xx
Cash receipts from contracts under investing xx
Purchase of property, plant, and equipment (xx) FINANCIAL PLANNING PROCESS
Cash payments from contracts under investing xx
Net cash from investing activities xx → A systematic approach to managing
one’s finances
Cash receipts from issuance of stocks xx → Involves evaluating an individual's or
Cash receipts from issuance of debt instruments xx family's current financial situation,
Repayment of long-term liabilities (xx)
identifying financial goals, creating a
Payments for dividends (xx)
Payments for interest (xx) plan to achieve those goals,
Net Cash from financing activities xx implementing the plan, and regularly
MSL

monitoring and adjusting the plan as CASH RECEIPT

needed.
→ refers to any inflow of cash into a
STAGES OF FINANCIAL PLANING business.
PROCESS → Some components of cash receipt are
cash sales, collection of cash receivable
1. Establishing goals
and other cash receipt.
2. Gathering financial data
3. Analyzing financial data CASH DISBURSEMENT
4. Developing a financial data
5. Implementing the financial plan → refers to any cash outflow from the
6. Monitoring and adjusting the financial business.
plan → These include any payments made with
cash or cash equivalents such as
payment for purchases or expenses
SHOT-TERM AND LONG-TERM FINANCIAL using cash
PLANS 𝑁𝑒𝑡 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 = 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑝𝑡
LONG-TERM (STRATEGIC) FINANCIAL + 𝐶𝑎𝑠ℎ 𝐷𝑖𝑠𝑏𝑢𝑟𝑠𝑒𝑚𝑒𝑛𝑡
PLAN 𝐸𝑛𝑑𝑖𝑛𝑔 𝐶𝑎𝑠ℎ = 𝑁𝑒𝑡 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 + 𝐵𝑒𝑔. 𝐶𝑎𝑠ℎ
→ Plans that lay out a company's planned −/+𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔
financial actions and the anticipated → Financing:
impact of those actions over periods o Add: Borrowings
ranging from 2 to 10 years. o Less: Repayments (w/ interest)
→ Long-term financial plans are part of an
integrated strategy that, along with PROFIT PLANNING: PRO FORMA INCOME
production and marketing plans, guides STATEMENTS
the firm toward strategic goals.
PROFIT PLANNING
SHORT-TERM (OPERATING) FINANCIAL
→ the process of creating a financial plan
PLANS
that outlines the expected revenues and
→ Specify short-term financial actions and expenses of a business for a given
the anticipated impact of those actions. period, typically a year.
Part of short-term financial plans include → The primary objective of profit planning
setting the sales forecast and other is to ensure that the company generates
forms of operating and financial data. a profit that meets its financial goals and
→ Those plans most often cover a 1- to 2- objectives.
year period. PRO FORMA
→ The first step in personal financial
planning requires you to define your → Pro forma means “for the sake of form”
goals. Whereas in a corporation, the or “as a matter of form."
goal is to maximize owner wealth (that → When it appears in financial statements,
is, share price), individuals typically it indicates that a method of calculating
have a number of major goals. financial results using certain projections
→ Generally, personal goals can be short- or presumptions has been used.
term (1 year), intermediate (2 to 5
PRO FORMA INCOME STATEMENTS
years), or long-term (6 or more years).
→ future version of an income statement.
Sales/Revenue xx
CASH PLANNING (CASH BUDGETING)
COGS (xx)
CASH BUDGET Gross Income xx
Operating Expenses (xx)
→ A cash budget is used internally by Operating Income xx
Interest Expenses (xx)
management to estimate cash inflows Income Before Tax xx
(receipts) and outflows (disbursements) Taxes (xx)
of cash during a period and the cash Net Income xx
balance at the end of a period.
→ In other words, a cash budget is a plan
PREPARING THE PRO FORMA STATEMENT
for an organization to obtain and use
OF FINANCIAL POSITION
resources over a specific period of time.
→ They do this to ensure they have → also called the Balance Sheet
enough funds to operate their business.
MSL

→ an accounting report that contains

information about a company's assets,
liabilities and equity.
COMPONENTS OF STATEMENT OF
FINANCIAL POSITION
1. ASSETS

→ Current assets
o cash or cash equivalents that are
expected to be converted to
cash within a year.
→ Non-current assets
o e long-term assets of a company
and represent a longer-term
investment as they cannot be
converted to cash quickly.
→ Intangible assets
o types of assets that lack a
physical presence and
substance, therefore making
them very hard to be evaluated
2. LIABILITIES

→ Current Liabilities
o amounts that are due and need
to be paid within one year.
→ Non-current liabilities
o usually the longer-term
obligations of a company that
are expected to be paid after
one year.
→ Owner’s debt
o A lot of times, a situation might
arise where long-term credit
facilities are required by the
company but are no longer
available as banks might not be
lending at attractive rates.
3. EQUITY

→ residual value of assets minus liabilities.

𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

MAIN PURPOSE OF STATEMENT OF

FINANCIAL POSITION

→ to provide information on the assets,

liabilities and net worth of an entity.