CASH FLOW AND FINANCIAL PLANNING:
ANALYZING A FIRM’S CASH FLOW
THE STATEMENT OF CASH FLOW
“Cash flow, the lifeblood of the firm, is the primary ingredient in any financial valuation model.”
the summary of a firm’s cash flow over a given period, which uses the data from income statement, along with the beginning and end of period balance sheets. -
allows the financial manager and other interested parties to analyze the firm’s cash flow -
used to evaluate progress toward projected goals or to isolate inefficiencies
*financial manager also can prepare a statement of cash flows developed from projected financial statements to determine whether planned actions are desirable in view of the resulting cash flows *manager should pay special attention both to the major categories of cash flow and to the individual items of cash inflow and outflow, to assess whether any developments have occurred that are contrary to the company’s financial policies
DEVELOPING THE STATEMENT OF CASH FLOWS
analysts typically lump cash and marketable securities together when assessing the firm’s liquidity because both represents a reservoir of liquidity: “increased by cash inflow and decreased by cash outflows”
Cash Flow Catergories:
Operating Flows – generated from a company’s normal operations such as the sale and production of firm’s products and services or the “operating activities”
The amount of cash that is generated by doing what you do.
How much cash is generated by making, selling or providing services or products to your customers. These are the activities or accounts found on Income statement.
All Cash Received – All Expenses for the Month
Investment Flows – associated with purchase and sale of both fixed assets and equity investments in other firms or the “investing activities” •
Inflows: Sales transactions
Outflows: Purchase transactions
The amount of cash flow generated by your equipment or vehicle purchases, or any buildings or property the business owns. Found in the Asset section of the Balance Sheet.
Note: the equipments we are referring to are considered long-term and will be “on-the-books” for several years.
Financing Flows – result from debt and equity financing transactions; or the “financing activities” •
Inflows: Incurrence of debt, sale of stock, and cash outflows to repurchase stock or pay cash dividends •
Outflows: Repayment of debt, repurchase of stock or payment of cash dividends
The amount of cash flow that is affected by increases and decreases to equity. In other words, how much cash flow is affected by paying down debt or securing a loan from an owner or a lending institution? Found in the Liability and Equity section of the Balance Sheet.
The statement of Cash Flow summarizes the inflows and outflows of cash during a given period
INFLOWS AND OUTFLOWS OF CASH
Decrease in Any Asset
Increase in Any Asset
Increase in any Liability
Decrease in Any Liability
Net Profits after Taxes
Depreciation and other noncash charges
Sale of Stock
Repurchase or Retirement of Stock
1. A decrease in an asset (i.e. firm’s cash balance) is an inflow of cash because that cash has been tied up in the asset is released and can be used for other purpose. On the other hand, an increase in the firm’s asset is an outflow of cash because additional cash is being tied up in the firm’s cash balance.
2. Direct entries of changes in retained earnings are not included on the statement of cash flows. Instead, entries for items that affect retained earnings appear as net profits or losses after taxes and dividends paid. 3. Since depreciation is treated as a separate cash inflow, only gross (compute: add back the depreciation charge to the change in net fixed assets) rather than net changes in fixed assets appear on the statement of cash flows. *if depreciation is treated as a cash inflow as well as the...
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