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The Cash Flow Statement
Lecture 3
This lecture is part of Chapter 1:
The Basic Financial Statements
Today’s Lecture
Understand the elements of the Cash Flow Statement
? Where does it go?
Make a simple Cash Flow Statement with MS Excel
Cash Flow
Help!
?
Where does it go?
? Holiday ..
In daily life, we all know the experience .. Where did the
money go? It’s good to know!
In business it’s essential to know!
Cash Flow Statement
The Cash Flow Statement is the third of the three basic
financial statements. It is closely related to matters
concerning the daily operation of a company.
The Cash Flow Statement shows where the money goes
(out-flows) and where it comes from (in-flows) during a
certain period of time.
It also shows the net in- or out-flow during that period of
time. This is an extremely important number in the
financial management of a company!
Cash Flow Statement
One way to look at the difference between the three basic
financial statements.
While the Balance Sheet shows cash balances and the
Income Statement where the money comes from or goes
to, the Cash Flow Statement shows why cash increased or
deceased.
Cash Flow Statement
In other words:
+ Beginning Cash Balance
- Cash Out-Flows (Uses)
+ Cash In-Flows (Sources)
= Ending Cash Balance
Cash Flow Statement
The Cash Flow Statement is usually divided into three
sections:
• Cash Flows from Operations
These are the cash flows generated by the daily running of the
business. E.g. the buying and selling of goods.
• Cash Flows from Investments
Usually, with investments one means here fixed assets like plant
and equipment.
• Cash Flows from Financing
Loans play an important part in most businesses. Here, mainly, the
cash flows related to the repayment of loans or the taking up of new
loans are listed.
This item could also e.g. contain the cash flows from issuing stock.
A Simple Cash Flow Statement
A B C D E F G
2
3 Ever Profit International
4 Cash Flow Statement for the Year ended Dec 31, 1999
5
6 Cash Flows from Operations
7 Receipts
8 Interest received from Investment 200
9 Payments from Customers 12000
10 Others 340 Let’s first
11 Disbursements
12 To suppliers -4800 clean this
13 To employees -5000
14 Others -200
up a bit
15 Net Cash Flow from Op. Activites 2540 =Sum(G7:G14) …
16 Cash Flows from Investing Activities
17
18
Purchase of Equipment
Sale of Equipment
-6000
1000
and then
19 Net Cash Flow from Inv. Activities -5000 =SUM(G17:G18) look at it
20 Cash Flows from Financing Activities
21 Taking up of a long term loan 12000 in more
22
23
Payment of Dividends to Share Holders
Net Cash Flow from Fin. Activities
-500
11500 =Sum(G21:G22)
detail …
24 Net change in Cash Balance 9040 =G15+G19+G23
A Simple Cash Flow Statement
3 Ever Profit International
4 Cash Flow Statement for the Year ended Dec 31, 1999 Use the
5 Center and
6 Cash Flows from Operations
7 Receipts
Merge
8 Interest received from Investment 200 Button
9 Payments from Customers 12000 Change the
10 Others 340
Font
11 Disbursements
12 To suppliers -4800
13 To employees -5000
Underline
14 Others -200 before the
15 Net Cash Flow from Op. Activites 2540 =Sum(G7:G14) subtotals
16 Cash Flows from Investing Activities
17 Purchase of Equipment -6000 Make the
18 Sale of Equipment 1000 main items
19 Net Cash Flow from Inv. Activities -5000 =SUM(G17:G18) italic
20 Cash Flows from Financing Activities
21 Taking up of a long term loan 12000
22 Payment of Dividends to Share Holders -500 Make the
23 Net Cash Flow from Fin. Activities 11500 =Sum(G21:G22) total bold
24 Net change in Cash Balance 9040 =G15+G19+G23
Some Notes
Many accountants compute the amounts for the Cash Flow
Statement by using the Income Statement and the changes
in the related Balance Sheet accounts.
This is often called the T-account approach. Of course this
only works if the relevant information is actually listed in
the Income Statement and Balance sheet.
Let us have a look at the items in the cash flow statement one
by one.
Elements of a Cash Flow Statement
Cash Flows from Operations
Receipts
Here the most important receipts from daily operations for the
business are listed. It is important to realize that the choice of what
to list and what not is dependent on the nature of the company.
Disbursements
Here the most important disbursements necessary for the daily
operations are listed. Again, the choice of what to list and what not
depends on the nature of the company.
Elements of a Cash Flow Statement
Cash Flows from Investing Activities
Purchase of Equipment
Most businesses cannot operate without some kind of investment.
In order to get (and keep) a company running, it needs to buy
certain equipment like e.g. computers and tools. Usually, such
items can be used for many years which is why they are not listed
under Cash Flow from Operations but separately.
Sale of Equipment
Of course one can also sell equipment previously bought. E.g. when
one wants to upgrade or when one no longer wants it. Think of
Singapore Airlines always wanting to have a nice new fleet. What to
do with those old planes? One option is to sell them.
Elements of a Cash Flow Statement
Cash Flows from Financing Activities
Long Term Loan
Knowing when and where to borrow money is an important aspect
of management. If you borrow at the wrong moment at the wrong
place you might end up in trouble. (Think Asian Crisis). On the
other hand, if you have a great idea and give up on it due to lack of
funds you might loose a fantastic opportunity.
Since cash inflows (or outflows) due to loans are not part of daily
operations, they are listed separately here.
Payment of Dividends
Of course the idea of ‘investing’ in a company as a shareholder is
to get more money back than one puts in. Some companies return a
part of their profits to the shareholders as dividends as a kind of
interest on their shares (note: this is usually a rather small amount).
Elements of a Cash Flow Statement
Net Change in Cash Balance
The net change in cash balance is an important indicator
for how well the company will be able to continue doing
business.
If the net change is strongly negative and the company has
little or no cash left, it will almost certainly need new
loans. It is good to know that one needs to plan for that.
On the other hand if the cash flow is positive and there are
little debts, extra cash for new investments or for
dividends will be available.
Generating the Statement
Now let us look at how we can actually obtain some of the
items from the Balance Sheet and the Income Statement.
Cash Flow from Operating Activities
Receipts
Payments from = Sales - Change in Accounts
Customers Receivable
Disbursements
To Suppliers = Cost of Goods sold + Change in
Inventory – Change in Accounts
Payable (for Inventory)
Key Points of the Day
The Cash Flow Statement provides important information
regarding the cash requirements of a company.
(Parts of) the Cash Flow Statement can be derived from the
Balance Sheet and the Income Statement by analyzing
changes.
