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Cash Flow With Explaination

Cash flow chapter

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Noor Khaliq
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9 views4 pages

Cash Flow With Explaination

Cash flow chapter

Uploaded by

Noor Khaliq
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Cash flow Statement

For cash flow statement we need


1. Current year income statement
2. Comparative Balance Sheet (Current year as well as previous year)

For statement of sources and uses we need


1. Comparative Balance Sheet (Current year as well as previous year)

Structure of Cash Flow Statement

Cash flow from operating activities

Net profit after taxes / Net Losses


+ Non-cash expenses (in particular, Depreciation, Amortization, Depletion etc.)
Change in current assets expect change in cash
Change in current liabilities
Cash provided by/used by operating activities xxxxx

Cash flow from investment activities

Change in gross fixed assets


Change in business interest
Cash provided by/used by investment activities xxxxx

Cash flow from financing activities


Change in long term debt
Change in stockholders equity except change in retained earnings
Dividend paid
Cash provided by/used by financing activities xxxxx

Net cash flow xxxxx


+ opening balance of cash xxxxx
= ending balance of cash xxxxx

Dividend paid = Net profit after taxes – Change in retained earnings


Baker Corporation
Statement of sources and uses
Items Change Source Use
Cash & marketable securities +500 500
Acc. Receivable -100 100
Inventory -300 300
Land and building +150 150
Plant and machine +150 150
Acc. Depreciation +100 100
Account payable +200 200
Notes payable -100 100
Other current liabilities -100 100
Long-term debt +200 200
Stockholders’ equity
Preferred stock -
Common stocks -
Paid in capital in excess of par -
Retained earnings +100 100
Total 1000 1000
Baker Corporation
Cash Flow Statement
For the year ended on 31st December 2012

Cash flow from operating activities


Net profit after taxes 180
Depreciation 100
Change in current assets except change in cash
Decrease in accounts receivable 100
Decrease in inventory 300
Change in current liabilities
Increase in accounts payable 200
Decrease in notes payable (100)
Decrease in other current liabilities (100)
Cash provided by operating activities 680 680
Cash flow form investment activities
Increase in land & building (150)
Increase in plant & machine (150)
Cash used by investment activities (300) (300)
Cash flow from financing activities
Increase in long-term debt 200
Change in SHE except change in retained earnings -
Dividend paid (NPAT – Δ in RE) (80)
Cash provided by financing activities 120 120
Net cash flow 500
Opening balance of cash December 2011 500
Ending balance of cash December 2012 1000
The purpose of cash flow statement is to seek the answer(s) of those questions
which can neither be answered by income statement nor balance sheet

1. Is the company generating sufficient positive cash flows from its ongoing
operations to remain viable?
2. Will the company be able to repay its debts?
3. Will the company be able to pay its usual dividend?
4. Why do net income and net cash flow differ?
5. Why a difference exist between opening balance of cash and ending balance
of cash?
6. To what extent will the company have to borrow money in order to make
needed investments?

1. Since Baker Corporation has generated positive cash from its operations that
is why we expect that this company will remain viable in future. So positive cash
flow from operations indicates the viability of business however negative cash
flow from operations indicates that viability of business is questionable.

2. Due to positive cash flow from operations the company is able to payback its
contractual obligations on time

3. The positive cash flow from operation enhance the firm’s ability to pay usual
dividend to preferred stockholders as well as to common stockholders

4. Net income differs than net cash flow because income statement prepared as
per accrual base of accounting and it contains non-cash revenues as well as
non-cash expenses.

5. Cash balance at the end differs than cash balance at the start due to the
reason that net cash flow is the outcome of three activities i.e. operating,
investment and financing. So each activity is either producing or using cash. In
this example cash generated from operating activities, cash used by investment
activities and cash provided by financing activities (680 – 300 + 120 = 500)

6. In this example, Baker Corporation invested cash 300. Their long-term debt
increased by $200. Surely $100 they have used from cash generated from
operation to support needed investment.

Nut shell of discussion


Positive cash flow from operations are considered good whereas negative cash
flow from operations are considered as bad
Negative cash flow from investing activities considered good whereas positive
cash flow operations are considered bad due to reason that if a firm invest cash
today then their future earnings will increase.
It is difficult to interpret financing activity. For instance, increase in long-term
debt not only increase the cash flow but also increase the financial burden and
probability of default. On the other hand increase in long-term debt leads to
increase in interest payment and only profitable firms take benefits of tax
concession on interest payment and resultantly effective cost of debt declines.
If cash flow increase due to increase in equity, the debt capacity of a firm
increase. But issuance of new shares hurt existing shareholders. Dividend
distribution positively effect market price of shares.

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