Lecture 05 - Cash flow statement Flashcards
Cash Flow Statement,
a general explaination:
- what information,
- for whom (3 how),
- why (use case)
- Provides information about how a company
generates and uses cash - Enables
investors and creditors
to assess:- Ability to settle liabilities
- Capacity to pay dividends
- Need for outside financing
- Allows
observation and assessment
of management’s investing and financing policies.
Describe CFS
- Less connected to (3)
- Information how (2)
- Used by (2)
- Less connected to
- Balance Sheet,
- Income Statement
- Statement of Stockholder’s Equity
- Provides information how a company
- generates
- uses cash
- Used by:
- Creditors,
to see if a firm can settle its liabilities and pay dividends - Investors,
to see if a company needs outside financing
Framework
for the „Statement of Cash Flows“ (3)
Cash receipts and payments are classified into 1 of 3 categories
(=> Change in cash and cash equivalents)
- Operating activities
- Investing activities
- Financing activities
Comparison:
Income Statement
vs.
Cash Flow Statement (4)
Income Statement:
- economic earnings of a company
-
profitability
(revenues & expenses)
Cash Flow Statement:
- how much cash being generated or used
-
performance
(cash in/out flow)
What categories,
as cash receipts and payments,
classified into?
- Operating Activites
- Investing Activities
- Financing Activities
⭐️
- Where is the focus in operating activities?
- Where are operating activities reported? (2)
The focus is on selling goods or rendering services.
Reported:
-
Income Statement
Accrual Basis
(Verbuchung von angefallenen, aber noch nicht bezahlten Einnahmen oder Ausgaben.) -
Statement of Cash Flows
Cash Basis
Investing Activities
(Cash outflow / inflow)
Investments in, own longer-term, assets:
Cash outflow, from
- buying other company’s stocks,
- lending etc.
Cash inflow, from divesting of
(sale or disposal)
- assets,
- business segments
Financing Activities (2)
-
Shareholders Cash
Receiving / Returning -
Creditors Cash
Borrowing / Repaying
How can you prepare
a statement of cash flows? (2)
Option 1: Direct Method
- often not practical
- Examine all cash transactions that occur during the period.
- Group them according to the type of activity.
Option 2: Indirect Method
- commonly used approach
- Reconcile the income statement and balance sheet information
- Changes in balance sheet accounts are explained on the income statement and statement of cash flows
- Group them according to the type of activity.
What are the main steps
to prepare the cash flow statement
using the indirect method? (4)
Make adjustments for operating activities .. (4)
1. Add back non-cash expenses:
- Depreciation and amortization
- Provision for bad debts
2. Adjust for changes in working capital:
- Accounts Receivable:
Subtract increases, add decreases - Inventory:
Subtract increases, add decreases - Accounts Payable:
Add increases, subtract decreases - Accrued Expenses and Other Liabilities:
Add increases, subtract decreases
3. Adjust for deferred revenues and prepaid expenses:
- Unearned Revenue:
Subtract increases, add decreases - Prepaid Expenses:
Subtract increases, add decreases
4. Adjust for gains and losses on asset sales:
- Subtract gains, add back losses
Operating Assets (3)
- Receivables,
- Inventories,
- Prepaid expenses
Operating Liabilities (6)
- Wage payable
- Taxes payable
- Interest payable
- Accounts payable
-
Accrued expenses
(earned but not yet paid) - Unearned revenue
What is the information provided via CFS? (2)
Provides a summary of a
- company’s cash inflows and outflows
- over a specific period,
Typically broken down into
- operating,
- investing,
- financing activities.
What is the purpose of a cash flow statement? (2)
show how changes in a company’s balance sheet and income statement
- affect its cash position.
- Assess a company’s:
liquidity, solvency,
and financial health.