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Analysis on Cash Flow 1

1. Purpose of Analysis on Cash Flow

2. Necessary for Analysis on Cash Flow

3. Usage and Limit for Analysis on Cash Flow

4. Concept of Fund

5. Cash Flow

6. Cash Flow Chart

7. Understandings of Cash Flow Chart

8. Classification of Cash Flow

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1. Purpose of Analysis on Cash Flow

Analysis on how fund has been procured and used with what purpose during certain period

Financial analysis method to analyze and evaluate the fund flow of company by revising cash flow chart drawn up as

Prescribed in financial accounting standard and officially announced in proper form for the purpose of analysis

2. Necessity for Analysis on Cash Flow

(1) Principle of corresponding to profit expense

Accrual Accounting

Cash Accounting

Recognition period of profit and expense does not necessarily accord with period of cash earning and expenditure

It is principle in that profit and expense is recognized at period when cash is colleted and paid respectively

Transaction Cash Accounting Accrual Accounting

Goods worth 10,000 was sold on credit.

No entries(No cash inflow)

Debit) Trade receivables 10,000Credit) sales 10,000

5,000 won among trade receivables was collected

Debit) cash 5,000 Credit) sales 5,000

Debit) cash 5,000Credit) trade receivables 5,000

< Difference in accrual accounting and cash accounting>

(2) Application of artificial standard : evaluation of inventory, calculation of depreciation, setting of various appropriation, etc

(3) In case management performance is in window-dressing

3. Usage and Limitation for Analysis on Cash Flow(1) Usage in analysis on cash flow

Direct grasping of fund flow

Use concept of net increase in cash

In case of (-) cash flow for sales activity, possibility for corporate insolvency can easily be determined

Prompt determination on degree of lack of fund

(2) Limitation in analysis on cash flow

Distortion of cash flow by calculation at beginning or end of the term : Possibility for generation of error in determination coexist

Limitation based on ratio of cash flow

Difficult in analysis on trend focusing on actual demand

Difficult in future estimation

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4. Concept of Fund

(1) Cash

① Cash : currency. personal checks, dividend stock, demand draft, etc

② Cash + Saving in bank (Except time deposits, installment deposits, restricted savings)

③ Cash and Savings + Cash equivalent (securities and short-term financial instrument high in liquidity)

(2) Net operating capital : Remaining after currency liabilities is deducted from currency asset(3) Total financial resource : Concept of fund relevant to change in not only cash and net operating capital but also all asset, liabilities and capital possessed by company

Cash & Savings + Cash EquivalentFund for Analysis

on Cash Flow

5. Cash Transaction

(1) Cash Transaction

<Reference> 8 elements of entry

Increase in AssetDecrease in LiabilitiesDecrease in CapitalGeneration of Expense

Decrease in AssetIncrease in LiabilitiesIncrease in CapitalGeneration of Profit

Debit Credit

(2) Non-cash profit and loss transaction (Ex) Depreciation, retirement benefits, losses from appreciation of securities, losses from appreciation of investment asset, gains and losses from foreign currency transactions, losses from damage, etc(3) Non-cash exchange transaction (Ex) Acquisition of fixed asset with issuance of long-term bill

6. Cash Flow Chart(1) Purpose of Cash Flow Chart

One of requisite financial statement company must official announced as prescribed in financial accounting standard

Report presenting the change in cash by indicating the cash inflow/outflow for certain sales period

(2) Purpose and Usage of Cash Flow Chart

· Provision of information on future cash creation capability of company

· Provision of information on necessity for dividend payment capability of company, liabilities repayment capability and external fund procurement

· Provision of information on difference between net profit of current term and net cash flow due to sales activity

· Provision of information on influence of cash/non-cash investment and financial transaction during certain period on the financial state of company

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7. Understanding of Cash Flow Chart(1) Understanding of cash flow chart based on accounting standard

· Cash flow chart is the financial statement drawn up so that interest party can easily grasp the cash flow of company

· Drawing period of cash flow chart :within accounting period of current year

· It is regulated that all transactions generating flow of fund in company management be drawn up

· Cash used as concept of fund in cash flow chart is cash, savings and cash equivalent

(2) Understanding of cash flow chart for financial analysis

< Structure of cash flow chart based on accounting standard >

① Cash flow by sales activity

② Cash flow by investment activity ----- ③ + ④

③ Cash inflow by investment activity

④ Cash outflow by investment activity

⑤ Cash flow by financial activity ---- ⑥ + ⑦

⑥ Cash inflow by financial activity

⑦ Cash outflow by financial activity

⑧ Increase (decrease) in cash ---- ① + ② + ⑤ = ⑩ - ⑨

⑨ Cash at the beginning of term

⑩ Cash at the end of term

Cash flow chart classifies the management activity accompanied by fund flow of company and Fund flow of company is organized as cash flow by sales activity, cash flow by investment activity and

cash flow by financial activity based on such classification

8. Classification of Cash Flow

(1) Cash flow by sales activity

: Means the flow of fund creating from sales relevant activity of company

<Financial Accounting Standard Article 82> Sales activity generally refers to the manufacturing of product, purchase and sale activity of product and service. It includes the transaction that does not fall under investment and financial activity.

<Financial Accounting Standard Article 82> Sales activity generally refers to the manufacturing of product, purchase and sale activity of product and service. It includes the transaction that does not fall under investment and financial activity.

▶ Indirect Method : Method to indicate by adding the expense without cash inflow to net profit of current term (or net loss of current term), subtracting the profit without cash inflow and adding change in asset and liabilities by sales activity

Direct Method &Indirect Method

▶ Direct Method : Profit or expense items generated accompanied by cash flow is indicated in total, cash inflow is the method to indicate cash inflow for each source and cash outflow for each use

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＋ Inflow from profit activity including sales (collection of cash sales + trade receivables)－ Outflow regarding purchase and staff (cash purchase and increase in inventory + repayment of trade payables + wage & salary payment + other cash expenditures)＋ Inflow of interest earned and dividend earned－ Interest expense and discount payment－ Outflow including corporate tax, etc 2`````

<Cash flow by direct method>

<Cash flow by indirect method>

＋ Net profit of current term (net loss of current term)＋ Expense without cash outflow (depreciation, retirement benefit, etc)＋ Cash expenditures by investment and financial activity (losses from disposition of investment asset, losses from disposition of tangible asset, etc) ＋ Reduction in asset by sales activity (reduction in trade receivable and inventories, reduction in advance and advance payment, reduction in accrued income, etc) ＋ Increase in liabilities by sales activity (increase in trade payables and increase in advance)－ Profit without cash inflow (recapture of investment valuation allowance, gains from investment valuation)－ Cash inflow profit by investment and financial activities (gain from disposition of investment asset and gain from disposition of tangible asset)－ Increase in asset by sales activity (increase in trade receivables and inventories, increase in advance and advance payments)－ Reduction in liabilities by sales activity (decrease in trade payables and advance)

<Ex> Draw up cash flow of sales activity by utilizing given income statement with direct and indirect method.

Income Statement Direct Method Indirect Method

Sales 10,000Raw Cost of Sales (7,000)Sales Expense (1,000)Depreciation (400)Gains from Disposition of Tangible Asset 200 Net Profit of Current Term 1,800

Sales Raw Cost of Sales Sales Expense Cash Flow of Sales Activity

Net Profit of Current Term Adding Expense without Cash Outflow (Depreciation) Subtracting Profit without Cash Inflow(Gain from Disposition of Tangible Asset) ( ) Cash Flow of Sales Activity .

According to the consideration of cash flow and operating fund by sales activity, it is analyzed classified into - Cash flow for profit and loss activity (total Cash Flow, total cash flow procured from sales activity) and

-Cash flow (net cash flow, net cash flow procured from sales activity) considering operating fund

Cash Flow considering the Cash Flow and Operating Fund in Profit and Loss Activity

Cash Flow Chart Based on

Financial Standard

Disadvantage in that analysis on operating fund is difficult since cash flow chart for various analysis used by evaluation or financial institutions and operating fund with same theoretical base are included for each element

General Financial Analysis

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▶ Cash flow for profit and loss activity

Cash flow that can be created by company under premise that there is no change of operating fund(trade receivables + inventories – trade payables) input by company to lead the regular sales activity

There is advantage in that scale of cash is maintained at certain level compared to cash flow considering the operating fund, it is common to present the considerable amount of rise and fall in cash flow for profit and lossactivity in case there is dramatic change in management performance

In case of profitability control by intentional window-dressing, the form is mostly composed by the excessive appropriation of trade receivables or excessive raw cost distribution of inventories. Therefore, there is no significance in cash flow for profit and loss activity when analyzing cash flow of such company.

▶ Cash flow considering operating fund

Calculation by reflecting the increase of operating fund, adding or subtracting sales relevant cash outflow items included in the current asset, current liabilities, long-term asset and long-term liabilities to cash flow for profit and loss activity.

Cash flow by sales activity reflected of change in operating fund means the scale of cash creation or cash creation capability created from normal sales by the company during certain period.

Advantage in that actual cash flow of company can be grasped with the reflection of the increase in sales through excessive appropriation of trade receivables and profitability and liquidity control, profitability control using inventories, etc to the operating fund However, calculation of operating fund for each accounting period -> difficulty in interpretation in case of dramatic rise and fall of operating fund

It refers to the scale of cash creation for each accounting period through sales activity and it is appropriate to Analyze cash flow by sales activity in cumulative aspect since it holds incremental conceptFund creating capability through sales activity company shall be determined by examining the scale and trend simultaneously.

-It is the index evaluating the performance of normal management activity, the foundation for

existence of company, based on cash and it plays most important role in analysis on cash flow

-Cash flow by sales activity is evaluated to be excellent and inferior as scale is big and small

respectively.

-In case cash flow by sales activity presents the (-) value,

It means that not only there are no fund creation through normal sales activity but also input of fund

for sales activity is continuously carried out. It is the main index to prove difficult of company in fund

status

Cash Flow by Sales Activity

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(2) Cash flow by investment activity : Part where information on cash flow procured or used in investment activity is explained in cash flow

chart

<Financial Accounting Standard Article 84>

Investment activity refers to the loan and collection of cash and acquisition &

disposition of securities, investment asset, tangible asset and intangible asset

<Financial Accounting Standard Article 84>

Investment activity refers to the loan and collection of cash and acquisition &

disposition of securities, investment asset, tangible asset and intangible asset

 <Cash flow by investment activity> + Decrease in non-cash current asset + Decrease in investment asset + Decrease in tangible asset - Increase in non-cash current asset - Increase in investment asset - Increase in tangible asset

Part of cash flow chart presenting the change in total asset accounts except the items relevant to sales activity and cash, savings items among asset items of balance sheet

· Inflow and outflow of cash is generated by disposition of possessing asset and acquisition of asset respectively

In case there are excessive cash inflow by investment activity, there is high possibility in that fund flow is inferior since opportunity for fund creation through sales activity in future is likely

to have been disappeared.

(3) Cash flow by financial activity

: Part of cash flow chart providing the information used or procured by financial

activity

<Cash flow by financial activity> + Increase in current liabilities + Increase in fixed liabilities + Increase in capital - Decrease in current liabilities - Decrease in fixed liabilities - Decrease in capital - Payment of dividend

<Financial Accounting Standard Article 85>Financial activity refers to the transaction that has influence on liabilities and capital account

including the loan and repayment of cash, issuance of new stock, payment of dividend, etc

<Financial Accounting Standard Article 85>Financial activity refers to the transaction that has influence on liabilities and capital account

including the loan and repayment of cash, issuance of new stock, payment of dividend, etc

It is drawn except the increase in liabilities relevant to operating fund (cash flow input to sales activity) among factors to increase the debt capital. It is part grasping the route of financial fund procurement and scale of procurement for each fund procuring agency

Although cash inflow by increase in capital has very positive influence on financial stability of company, excessive procurement of debt lowers the financial stability of company and worsens the fund status of company.

Cash outflow by financial activity is the part utilized to analyze influence of financial fund operation on the fund flow of company together with the financial stability of company by enabling the grasping ofoperating agency and scale used in financial activity.