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Copyright 2009 by The McGraw-Hill Companies, Inc. All rights
resere!.McGraw-Hill"Irwin
Financial
Statement
Analysis
K R Subramanyam
John J Wild
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07CHAPTER
Cash Flow Analysis
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Statement of Cash Flows
Cash is the most liquid of assets. Offers both liquidity and
flexibility.
Both the beginning and the end of a comany!soerating cycle.
Contrast" #ccrual accounting and Cash basisaccounting. $et cash
flo% as the end measure of rofitability.
Cash flo% analysis hels in assessing liquidity&sol'ency&
and financial flexibility.
(ele'ance of Cash
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7-)
Statement of Cash Flows
*tatement of cash flo%s +*C, hels addressquestions such as" How
much cash is generated from or used in operations?What expenditures
are made with cash from operations?
How are dividends paid when confronting an operating loss?
What is the source of cash for debt payments?
How is the increase in investments financed?
What is the source of cash for new plant assets?
Why is cash lower when income increased?
What is the use of cash received from new financing?
(ele'ance of Cash
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Statement of Cash Flows
/he *C, reorts cash receits and cash ayments byoerating&
financing& and in'esting acti'ities"
Operating activities are the earning-related acti'itiesof a
comany.
eporting by Activities
!eyond revenue and expense activities
represented in an income statement" they includethe net inflows
and outflows of cash resulting
from related operating activities li#e extending
credit to customers" investing in inventories" and
obtaining credit from suppliers$
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7-0
Statement of Cash Flows
%nvesting activitiesare means of acquiring anddisosing of
noncash assets.
1n'ol'e assets exected to generate income lending funds
andcollecting the rincial on these loans.
Financing activities are means of
contributing&%ithdra%ing& and ser'icing funds to suort
business
acti'ities. 1nclude borro%ing and reaying funds %ith bonds and
otherloans contributions and %ithdra%als by o%ners and their
returnon in'estment.
eporting by Activities
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Statement of Cash Flows
eporting by Activities
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Statement of Cash Flows
1ndirect 4ethod $et income is ad5usted for non-cash income
+exense items and accruals to yield cash flo% fromoerations
6irect 4ethod ach income item is ad5usted for its related
accruals
Both methods yield identical results-only theresentation format
differs.
Constructing the Cash Flow Statement
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Statement of Cash Flows
Consider first the net cash from oerations.
&reparation of the SCF '%ndirect method(
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Statement of Cash Flows
6ereciation and amorti;ation add-bac
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7-99
Statement of Cash Flows%ncome v)s Cash Flows * +xample
Consider a =9:: sale on account
+9 1n eriod of sale& net income is increased by =9:: but no
cashhas been generated.
$et 1ncome 9::
6ereciation and amorti;ation exense :>ains +losses on sale of
assets :
Change in accounts recei'able +9::
$et Cash flo% from oerations :
1n eriod of collection no income is recorded.$et 1ncome :
6ereciation and amorti;ation exense :
>ains +losses on sale of assets :
Change in accounts recei'able 9::
$et Cash flo% from oerations 9::
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Statement of Cash Flows
#d5ustments for changes in balance sheetaccounts can be
summari;ed as follo%s"
&reparation of the Statement of Cash Flows
7 93
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Statement of Cash Flows
Constructing the Statement
9. /he comany urchased a truc
