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CASH FLOW - One

The document discusses the statement of cash flows, which assesses a firm's ability to generate and use cash and shows where cash comes from and what it is used for. Cash flows are divided into three activities - operating, investing, and financing. The statement can be prepared using either the indirect method, which analyzes balance sheet account changes, or the direct method, which analyzes cash flows directly for each source and use.

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PUTTU GURU PRASAD SENGUNTHA MUDALIAR
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91 views11 pages

CASH FLOW - One

The document discusses the statement of cash flows, which assesses a firm's ability to generate and use cash and shows where cash comes from and what it is used for. Cash flows are divided into three activities - operating, investing, and financing. The statement can be prepared using either the indirect method, which analyzes balance sheet account changes, or the direct method, which analyzes cash flows directly for each source and use.

Uploaded by

PUTTU GURU PRASAD SENGUNTHA MUDALIAR
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Statement of Cash Flows

Prof. PUTTU GURU PRASAD


FACULTY
INC GUNTUR
pgp4149@gmail.com
Statement of Cash Flows
• Assesses the firm’s ability to
generate cash and cash
equivalents
• Assesses the firm’s cash
requirements or uses
• Statement of Cash Flows shows
– Where did the cash come from?
– What was the cash used for?
– What was the change in the cash
balance?
Statement of Cash Flows

• Cash activities are divided into three main


categories:
Operating Activities
– Normal day-to-day activities

Investing Activities
– Changes in long-term assets and
investments
Financing Activities
– Changes in equity and non-operating
Cash Inflows and Outflows
Operating Investing Activities Financing Activities
Activities •Sale of property, plant, •Issuance of equity
•When operating and equipment securities
cash receipts > cash •Sale of debt or equity •Issuance of debt
expenditures securities of other (bonds and notes)
entities
•Collection of loans to
other entities

Cash
Pool
Cash Inflows
Cash Inflows and Outflows

Cash Outflows
Cash Pool

Operating Investing Activities Financing Activities


Activities •Purchase of property, •Payment of dividends
•When operating plant, and equipment •Redemption of debt
cash expenditures < •Purchase of debt or •Reacquisition of capital
cash receipts equity securities of other stock
entities
•Loans to other entities
Statement of Cash Flows

• There are TWO methods of preparing


the statement of cash flows:
– indirect method (alternative #1)
– direct method (alternative #2)
• The indirect method analyses balance
sheet account changes
• The direct method analyses the changes
in cash by determining cash flows
directly for each source or use of cash
• Any non-cash transactions are omitted
from the statement (under each
method)
Preparing a Cash Flow Statement

Alternative #1 (Indirect Method)


Information required:
1. Comparative Balance Sheets
2. Current Income Statement
3. Other information and transaction
data
Indirect Method

Operating Activities
• Start with Net Income (Loss)
• Changes in Current Assets (other than cash)
and Liabilities
– Increase in a current asset = use of funds (Decrease =
source of funds)
– Increase in a current liabilities = source of funds
(Decrease = use of funds)
• Non-cash expenses (e.g. amortization, bad
debts expense)
• Non-operating gains and losses
– Gains are treated as a use of funds from operating
activities
– Losses are treated as a source of funds from operating
Indirect Method
Investing Activities
• Changes in Long-term assets
– Increase = use of funds
– Decrease = source of funds
• If assets have been disposed, report only
the cash proceeds of disposition
Financing Activities
• Changes in Long-term liabilities and equity
– Increase = source of funds
– Decrease = use of funds
Usefulness of the Statement of
Cash Flows

• Cash is the long-term indicator of


a firm’s success or failure
• Useful to creditors in answering
three main questions
1. Success in generating net cash from
operating activities
2. Operating cash flow trends or patterns
3. Major reasons for positive or negative
net cash from operating activities
(Diagnostics)
The Cash Flow Statement

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