1. The Cash Flow Statement Lecture 3 This lecture is part of Chapter 1: The Basic Financial Statements

2. Today’s Lecture Understand the elements of the Cash Flow Statement Make a simple Cash Flow Statement with MS Excel Where does it go? ?

3. Cash Flow Where does it go? Help! ? ? 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! Holiday..

4. 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!

5. 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.

6. Cash Flow Statement In other words: + Beginning Cash Balance - Cash Out-Flows (Uses) + Cash In-Flows (Sources) = Ending Cash Balance

7. 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.

8. A Simple Cash Flow Statement Let’s first clean this up a bit … and then look at it in more detail … Incomprehensible!!! But difficult??

9. A Simple Cash Flow Statement Use the Center and Merge Button Change the Font Make the total bold Underline before the subtotals Make the main items italic

10. 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.

11. 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.

12. 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.

13. 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).

14. 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.

15. 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 Disbursements Generating the Statement Payments from Customers =Sales - Change in Accounts Receivable To Suppliers=Cost of Goods sold + Change in Inventory – Change in Accounts Payable (for Inventory)

16. 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.