Module 1: An overview of financial management

Financial Management - The finance manager plays a vital role in the company’s success.

As cash flows into the company, the finance manager thinks of how it will be used daily and

how it will help the firm sustain its operations in the future. If finance is in the heart of

everything that goes on in the company, managing it is difficult because the person

handling it must be involved in every activity that the firm may perform. The financial

manager has to be in touch with the operations, marketing, and overall strategy of the

company.

In the past, a finance manager was only involved in simple bookkeeping tasks such as

documentation, record-keeping, preparation of financial reports and payments of the

company’s bills. As time went by, the task of the finance manager evolved, going deeply

into the major aspects of the firm’s activities. This role critically developed to what is now

known as financial management.

Financial management is more concerned with raising, allocating, and controlling the firm’s

funds. In times of financial trouble, the finance manager must find ways to get its

financial position in order. The kind of questions that one has to answer when dealing

with financing are as follows?

• Should the firm borrow money? Short-term or long-term?

• Did the firm generate enough funds to sustain its activities?

• Should they issue additional shares of stocks and would these be preferred or common?

If the firm has enough money, the finance manager again has to know how to allocate the

money in order to generate wealth for the stockholders.

• Should the firm invest in short-term marketable securities or long-term investments?

• Should they pay their debts or pay dividends to their stockholders?

The firm’s goal - The economic problem-a fundamental theoretical principle in the

operational dynamics of an economy-states that human wants or needs are unlimited but

resources are finite. To satisfy their unlimited wants, people would seek to maximize the

utilities of whatever resource they possess. Utilities include satisfaction, pleasure, or

usefulness. However, maximizing utility is only possible if the people concerned could

produce savings out of their earnings and do whatever they want to do with it.

People always have the option to choose what to do with their earnings. They can

spend, save, or invest it. Spending could satisfy wants immediately but not maximize utility

because it makes one lose the opportunity to have more earnings if saved. On the other

hand, people who choose to save their money defer the enjoyment of their resources in

the hope of earning more so that they can better enjoy it in the future. People who save

their money in order to invest it could have a better chance of satisfying their wants and

maximizing its utility.

The primary objective of the firm's finance manager is to maximize the return that

it could offer to the people who trust the company. People who invest in the stock of a

particular company will contribute towards maximizing their investment's utility. In

conclusion, the generally accepted goal of the firm is to maximize the wealth of its

common stockholders through the value of its common stock.

Why not maximize profit? - Some of the

arguments that oppose profit maximization

as the main objective in financial

management are as follows:

1. A change in profit is also a change in

risk Profit maximization does not consider

risk or uncertainty, whereas wealth

maximization does. For instance, a firm whose annual sales is P1,000,000 per year likes to

attain a 20% increase in the succeeding year. In doing so, The firm decides to change its

credit policy by prolonging its credit term from 30 to 45 days.

In wealth maximization, before offering an increase in credit term, the cost and benefit

should first be measured. The firm should try to answer the following:

• Will the relaxation of credit terms bring more benefits than the cost of investing in

accounts receivable?

• Is the benefit more than the cost of capital invested in accounts receivable? If the

answers to the preceding questions are yes, then the firm may change its credit policy.

2. It fails to determine the timing of benefits. - In profit maximization, the firm does

not care if the cash flow is higher or lower in the early years of the project. Higher

cash inflow in the early years would mean better benefits to the firm because of the

possibility of generating order potential income, however this is only true if the

alternatives under consideration would give the same cash benefit over the same number

of years.

3. Accounting profits cannot be measured accurately. - The reported accounting profits

are mere estimates of how much net income is generated for a particular period of time.

The real accounting profits are only measured at the end of the life of the company. It is

only by that time that the company may determine if its entire operation is successful or

not. It is for this the same reason why financial management is more concerned with the

cash inflow rather than the accounting profits. The profit itself does not generate cash if

sales connected are on credit. The finance manager measures the cash inflows which are

then invested to generate accounting profits.

The roles of financial managers - The financial manager of the firm plays a crucial role in

the company's goals, policies, and success. The responsibilities of the financial manager

include the following:

1. Investment decision - This entails an outflow of resources with the expectations of

a benefit in the form of cash inflow in the near future.

 2. Financing decision - The financial manager finds a way to provide money for the

activities of the firm. He or she must know where to outsource its funds.

Short-term or long-term debt or equity financing has to be considered.

3. Dividend policy decision - It is usually important to know what sound dividend policy

is a good financial signal to the market that continually assesses the company.

Dividend declaration reflects a profitable status of the company.

Financial decisions and risk-return trade off - It is significant to note that an increase

in return is coupled by corresponding increase in risk. It cannot be expected that

whatever financial decision is made will immediately favor the firm. The finance manager’s

obligation is to ascertain that such risk present is tolerable. It could be created, financial,

political, interest and social. The firm must recognize the risk and include this in whatever

financial decisions it will make. The aphorism “the higher the return, the higher the

risk”, must always be kept in mind.

Forms of business organization - The basics of financial management are the same for all

businesses, large or small, regardless of how they are organized. Still, a firm’s legal

structure affects its operations and thus should be recognized.

There are four main forms of business organization:

1. Proprietorship - A proprietorship is an unincorporated business owned by one

individual. Going into business as a sole proprietor is easy-a person begins business

operations with advantages below:

● They are easily and inexpensively formed.

● They are subject to few government regulations.

● They are subject to lower income taxes than corporations.

However, proprietorships also have three important limitations:

● Proprietors have unlimited personal liability for the business debts, so they can lose

more than the amount of money they invested in the company.

● The life of the business is limited to the life of the individual who created it; and

to bring in new equity, investors require a change in the structure of the business.
 ● Proprietorships have difficulty obtaining large sums of capital hence,

proprietorships are used primarily for small businesses.

2. Partnership - A partnership is a legal arrangement between two or more people who

decide to do business together. Partnerships are similar to proprietorships in that

they can be established relatively easily and inexpensively. Moreover, the firm’s

income is allocated on a pro rata basis to the partners and is taxed on an individual

basis. This allows the firm to avoid the corporate income tax. Generally subject to

unlimited personal liability,

A basic requirement for the registration of partnership with the Securities and Exchange

Commission (SEC) is the filing of the Articles of Co-partnership. The SEC is a government

body that supervises the affairs of the partnership and corporate forms of business.

The following information is obtained in the articles of co-partnership.

● Name of the partnership

● Principal place of the business

● Date and effectivity of the life of the partnership

● Purpose of the partnership

● Names, addresses, and contributions of the partners

● Agreement as to the manner of management of the partnership

● Manner of dividing the profits between or among the partners

● Manner of liquidating the partnership with the rights and duties of the partners

● Arbitration of disputes

3. Corporation - A corporation is a legal entity created by the state, and is separate

and distinct from its owners and managers. Corporations also have unlimited lives,

and it is easier to transfer shares of stock in a corporation than one’s interest in an

unincorporated business. The owners of the corporation are called shareholders or

stockholders. The ownership interest in the company is evidenced by readily

transferable shares of stock issued (or sold) by the corporation.

The following reasons, the value of any business other than a relatively small one will

probably me maximized if it is organized as a corporation:

● Limited liability reduces the risks borne by investors; and other things held

constant, the lower the firm’s risk, the higher its value.

● A firm’s value is dependent on its growth opportunities, which are dependent on its

ability to attract capital. Because corporations can attract capital more easily than

other types of businesses, they are better able to take advantage of growth

opportunities.

● The value of an asset also depends on its liability, which means the time and effort

it takes to sell the asset for cash at a fair market value. Because the stock of a

corporation is easier to transfer to a potential buyer than is an interest in a

proprietorship or partnership, and because more investors are willing to invest in

stocks than in partnerships (with their potential unlimited liability), a corporate

investment is relatively liquid. This too enhances the value of a corporation.

MISCONCEPTION ABOUT FINANCIAL MANAGEMENT

• Financial management is accounting

• Financial management is a review of mathematics

• Financial management is a branch of statistics.

AGENCY THEORY

The agency theory poses a potential conflict between the stockholders and the managers.

This theory exists due to the creation of an agency relationship. This relationship is borne

as soon as an individual or group of people called the principals, hire the service of an

individual or organization called an agent to perform a service and exercise

decision-making for the principal.

The primary agency relationships are those between:

a. stockholders and managers

b. stockholders and creditors

 Module 2: Financial Statements

Financial statement - is the summarized data of a company’s assets, liabilities, and

equities in the balance sheet and its revenue and expenses in the income statement. Its

objective is to provide information about the financial position, result of operations, and

cash flows of an enterprise that is useful for decision-making to a wide range of users.

Financial managers use these statements in financing, investing, and formulating dividend

policy decisions. They are concerned primarily with the standing of the company and its

profitability that leads to maximization of stockholders’ wealth. They use financial

statements as their first-hand information about the company’s performance in the past

and its prospects in the future.

Components of financial statements

Balance Sheet - A statement showing the financial position of the company at a particular

time. It is composed of the company’s assets and liabilities and stockholder’s equity.

Income Statement - It is a formal statement that shows the result of the operations for

a certain period of time. It presents the revenues generated during the operating period,

the expenses incurred, and the company’s net earnings.

It is used to distinguish four broad classes of expenses:

1. cost of goods sold - which is a direct cost attributable to manufacturing the product

sold by the firm;

2. general and administrative expenses - which correspond to overhead expenses,

salaries, advertising, and other operating costs that are not directly attributable to

production;

3. interest on the firm’s debt

4. taxes on earnings owned to the government

Statement of Stockholders’ Equity - The statement of changes in stockholders’ equity is

a required basic statement that shows the movements in the components of the equity.

The major elements of the statement equity include:

a. Issuance of stocks - These are the common or preferred stocks issued during the year.

b. Retained earnings - Accumulated income or loss of the company for the past years of

operations.

c. Declaration of cash dividends - Deduction from retained earnings.

d. Distribution of stock dividends - It discloses the stock dividend rate and the amount of

stock dividends distributed to stockholders.

e. Purchase and sale of treasury stock - Firm’s stocks originally issued but were bought

back and were not retired. Shown as addition to stockholders’ equity while the purchase is

shown as deduction.

f. Accumulated other comprehensive income - Includes unrealized gains and losses on

available-for- sale investment and foreign-currency translation adjustments.

g. Correction of errors - It lists errors in the past but corrected in the coming year.

Cash Flow Statement - It is the financial statement that shows the firm’s cash receipts

and payments during a specified period of time. While the income statement and balance

sheet are based on accrual methods, the statement of cash flow recognizes only

transactions in which cash changes hands.

Few ways of cash flow are being used

a. The cash from operating activities is compared with the company’s net income - If

the cash from operating activities is consistently greater than the net income, the

company’s net income or earnings are said to be of “high quality,”. If cash from operating

activities is less than net income, a red flag is raised as to why the reported net income is

not turning into cash.

b. The cash flow statement identifies the cash that is coming in and going out of the

company - If a company is consistently generating more cash than it is using, the company
will be able to increase its dividend, buy back some of its stock, reduce debt, or acquire

another company. All of these are perceived to be good for stockholder value.

c. Some financial decisions such as capital budgeting decisions are based on cash flow

Net income - as reported on the income statement in not cash; and in finance, “cash is

king.” Management goals are to maximize the price of the firm’s stock and the value of any

asset, including a share of stock, is based on the cash flows the asset is expected to

produce.

Statement of cash flows shows how much cash the firm is generating. The statement is

divided into four sections as follows: Statement of cash flows shows how much cash the

firm is generating. The statement is divided into four sections as follows:

Operating activities – deals with items that occur and part of normal ongoing operations.

a. Net income – the first operating activity is the net income, which is the first source of

cash. If all sales were for cash, if all costs required immediate cash payments, and if the

firm were in a static situation, net income would equal cash from operations.

b. Depreciation and amortization – the first adjustment relate to the depreciation and

amortization. Accountants subtracted depreciation, which is a noncash charge, when they

calculated net income. Therefore, depreciation must be added back to net income when

cash flow is determined.

c. Increase in inventories – to make or buy inventory items, the firm must use cash. It

may receive some of this cash as loans from its suppliers and workers (payables and

accruals); but ultimately, any increase in inventories requires cash.

d. Increase in accounts receivable – if a company chooses to sell on credit when it makes

a sale, it will not immediately get the cash that it would have received had it not extended

credit. It must replace the inventory that is sold on credit.

e. Increase in accounts payable – accounts payable represent a loan from suppliers if a

The company bought goods on credit.

f. Increase in accrued wages and taxes – same logic applies to accruals as to accounts

payable.

g. Net cash provided by operating activities - all of the previous items are part of the

normal operations-they arise as a result of doing business. When we sum them, we obtain

the net cash flow from operations.

Long-Term Investing Activities – all activities involving long-term assets are covered in

this section, for example, acquisition of some fixed assets.

a. Additions to property, plant and equipment – if a company spends on fixed assets

during the current year, this is an outflow but if a company sold some of its fixed assets,

this would have been a cash inflow.

b. Net cash used in investing activities – sum of the investing activities.

Financing Activities

a. Increase in notes payable – if a company borrowed from the bank for this purpose its

cash inflow, if the company repays the loan, this will be an outflow.

b. Increase in bonds (long-term debt) – if the company borrowed from long-term

investors, issuing bonds in exchange for cash, this is an inflow. When bonds are repaid by

the firm, it is an outflow.

c. Payment of dividends to stockholders - paid to stockholders and to be shown as

negative amounts.

d. Net cash provided by financing activities - sum of the financing activities.

Summary -this section summarizes the change in cash and cash equivalents over the year.

a. Net decrease in cash (I,II,III) – net sum of the operating activities, investing

activities and financing activities is shown here.

b. Cash and equivalent at the beginning of the year.

c. Cash and equivalent at the end of the year.

Accounting Policies and Notes to Financial Statements - These are guidelines used in

the preparation of the financial statements. Detailed information not appearing in the

financial statements is also located in this part for clarification, for instance, the method

used in depreciating the assets (straight-line method, sum-of-the-years’ digit method,

declining method), valuation of inventory (FIFO, LIFO, average), and issuance of capital

stocks)

Limitations of financial statements

There are variations in the application of accounting principles - There are general

standards followed in the application of accounting principles. The applications vary

because of the different methods and procedures used. For instance, in the computation

of depreciation expenses, the firm may use the straight-line method, the sum-of-the

years' digit method or the replacement method.

Financial statements are interim in nature - The financial position and results of the

operation of the company prepared at every interval, normally one year, are mere

estimates of the performance of that firm in that particular period. Thus, the true

performance of the company will only be determined upon its liquidation.

Financial statements do not reflect changes in the purchasing power of the peso -

Financial statements are prepared based on the historical cost and do not reflect the

current market value of the assets.

Financial statements do not contain all the significant facts about the business -

Investors do not rely only on quantitative factors presented in the financial statement.

They also depend heavily on other pieces of information about the company such as the

stockholders, composition of the board of directors, projects undertaken, and the overall

performance of the company relative to the industry, among others.

 Module 3: Analysis of financial statements

Financial Statement Analysis - Financial statement analysis is an evaluation of the past

and current performance of the firm and its forecast in the future. It allows comparison

of one company with another. Financial statement analysis involves calculations. Firms

compute by combining accounts coming from an income statement to the balance sheet or

vice-versa or by simply relating an account within the statement. These calculations help

the management assess the deficiencies and take necessary actions to improve

performance.

Tools and Techniques in Financial Analysis

1. Horizontal Analysis - This is used to evaluate the trend in the accounts over the years.

It is usually shown in comparative financial statements.

a. Comparative statements – compared are financial data

of two years showing the increases or decreases in the

account balances with their corresponding percentages.

b. Trend Ratio – a firm’s present ratio is compared with its

past and expected future ratios to determine whether the

company’s financial condition is improving or deteriorating

over time. It is similar to comparative statements except

that several consecutive years were used showing the

behavior of the financial data.

2. Vertical Analysis - It uses a significant item on the financial statement as a base value.

All other financial items on the statements are compared with it.

a. Common size statement – each account in the financial statements is expressed by

dividing them into a common base account (total assets, liabilities and equity, sales or net

sales).
b. Financial ratios- classified into five groups:

• Liquidity ratio – is a company’s ability to meet its maturing short-term obligations. A

company with poor liquidity may have a poor credit risk, perhaps because it is unable to

make timely interest and principal payments.

• Activity or asset utilization ratio – is used to determine how quickly various accounts

are converted into sales or cash.

• Leverage ratio (solvency)- is the company’s ability to meet its long-term obligations as

they become due.

• Profitability ratio – shows the profitability of the operations of the company. It

highlights the firm’s effectiveness in handling its operations. Investors will be reluctant to

invest in a company that has poor earning capacity.

• Market value ratio-related the firm's stock price to its earnings.

Financial ratios provide two types of comparisons:

1. Industry Comparison - Financial ratios are computed and compared with the industry

average. Through industry comparison, the company may be able to compare their

performance against their competitors' and how they fare with them.

2. Trend Analysis - The firm's financial ratios are computed and compared with their past

performance. By the trends, the company will know if their financial performance is

improving or not over the years. It is a very powerful tool in deciding the actions that a

company should take in the future.

Liquidity Ratios - The firm's liquidity also affects its capacity to borrow. A low liquidity

position of a firm will make loan applications difficult due to poor credit risk.

Working capital - Working capital or net working capital is the difference between the

firm’s current assets and current liabilities

Current ratio - is computed by dividing current assets by the current liabilities. This ratio

is probably the most frequently used measure of liquidity. It assesses the ability of the

firm to meet its current liabilities as paid by its current assets.

Quick ratio - With the known limitation of current ratio, a more stringent one is used.

That is the quick ratio or acid test ratio. Quick ratio, like current ratio, reflects the firms’

ability to pay its short-term obligations. Thus, the higher the quick ratio, the more liquid

the firm is.

Cash Position Ratio – the cash position ratio is a step closer to pure liquidity by

removing the accounts receivable from the quick ratio.

Activity ratio or asset management ratios - measure the firm's efficiency in managing

its assets. These activity ratios are used to determine how rapid various accounts are

converted into sales or cash.

Accounts receivable turnover – estimates how fast the accounts receivable is converted

into cash during the year. If there is no net credit sales information, net sales can be

used.

Average Collection Period – the average collection period measures the efficiency of the

firm's collection policy by computing the number of days to collect the receivables.
Inventory turnover – the inventory turnover shows the efficiency of the firm in handling

its inventory. It measures how fast the inventory is turned into sales. A low inventory

turnover rate may point to overstocking, obsolescence, or deficiencies in the product line

or marketing effort. As a result, there will be a high carrying cost for storing the goods as

well as a risk of obsolescence.

Operating cycle – the operating cycle measures the time it takes to convert the

inventories and receivables to cash. Hence, a short operating cycle is desirable.

Fixed-asset Turnover – fixed-asset turnover ratio measures how well the firm uses every

peso of fixed asset invested to generate sales. Thus, it becomes a good indicator of

efficiency in the use of a fixed asset.

Total asset turnover – the total asset turnover ratio measures the firm's ability to

generate sales successfully. A low asset turnover ratio may be due to many factors, and it

is important to identify the underlying reasons.

Risk and Return Trade-off Between Liquidity and Activity Ratios - A trade-off exists

between liquidity risk and return. Holding a high amount of current assets

means less liquidity risk and less returns to the firm.

Leverage ratios - indicate up to what extent the firm has financed its investments by

borrowing. Firms that use debt financing rather than equity financing increase the risk of
the firm. The more debt they incur, the higher their leverage ratio is and the higher the

financial risk they face.

Debt Ratios – This ratio shows the portion of the total assets financed by the creditors.

The provider of funds other than the stockholders prefers to see a low debt ratio because

there is a greater chance for creditors to collect their receivables when the firm goes

bankrupt. Firms with high debt ratio are more likely to encounter difficulty in securing

additional funds.

Debt-to-equity ratio – the debt-to-equity ratio measures the proportion of the total

liabilities to the invested capital. A high debt-to-equity ratio means that the firm financed

the assets mostly by debt. A low debt-to-equity ratio means that the firm paid for the

assets by means of capital infusion by the stockholders.

Times interest earned ratio – reflects the number of times the earnings before tax and

interest expense cover the interest expense. It measures how capable the firm is in paying

its interest obligations. This ratio is the equivalent of a person taking the combined

interest expense from his or her mortgage, credit cards, auto and education loans, and

calculating the number of times he or she can pay it with his or her annual pre-tax income.

Profitability ratio - measures management effectiveness in terms of rate of return to

sales, assets, and equity.

Gross Profit Margin – it is a measurement of a company's manufacturing and distribution

efficiency during the production process. It tells the percentage of sales left after

subtracting the cost of goods sold.

b. Profit Margin – is another measurement of management's efficiency. It is the ratio of

net income to net sales.

Return on investment (ROI) measures the income generated for every peso investment

made in the firm. The higher the income generated per peso investment, the better. The

commonly used return on investment ratios are the return on total assets (ROA) and the

return on equity (ROE).

DuPont Analysis - is an integrative approach in explaining and looking at the differences

in return on total assets. It is another way of computing the return on assets by getting

the product of the profit margin and the total asset turnover.

The return on common stock equity - measures the rate of return earned on common

stock equity.
Equity multiplier - is a measure of financial leverage that allows the investor to examine

the contribution of debt on the return on equity.

Firms with a huge amount of debt will have high equity multipliers. To compute for ROE

using the DuPont model,

The market value ratio - is a measure of the firm's performance as perceived by the

general market. Investors value the firm through its stock price traded in the stock

exchange. The higher the stock price, the better the performance as perceived by the

market.

a. Earnings per share – this measures the income generated per common stock held.

b. Price/Earnings (P/E) Ratio – P/E ratio is a useful indicator of the investor's perception

about the firm's future prospects. A firm's P/E ratio depends primarily on two factors:

the future growth in earnings and the risk directly associated with expected earnings.

Book value per share - is the value of the firm on the perspective of accounting while

market value signifies the market valuation of the firm's equity.

Market-to-book value ratio – it is the value of the firm's security as perceived by the

market in relation to the value of the firm. A high market-to-book value ratio means that

investors are more optimistic about the market value of the firm's resources,
Dividend ratios - ratios measuring the percentage of dividends declared by the board of

directors to their stockholders.

a. Dividend yield – this ratio reflects the relationship between the dividends earned per

share and the market price of the stock. It shows the rate of return on the stockholders

using market price as the base.

b. Dividend payout ratio – this measures how much of the earnings per share was declared

as dividend.

Limitations of ratio analysis

1. Variation in the practices and methods in the application of accounting from one firm to

another may result in a meaningless comparison of financial ratios

2. Although the financial ratio has a predictive value, ratios are still static and a mere

estimate of the future.

3. Transactions are recorded based on acquisition costs and do not consider the effects of

inflation.

4. Financial ratio analysis is essential in comparing firms belonging to the same industry.

Firms whose activities are well diversified are too difficult to be classified in an industry.

5. Although industry averages are published, at times, it is difficult to use them because

of the complexities of the different sectors belonging to the industry.

6. A ratio does not show its major components; thus, it is incorrect and misleading to

interpret a particular ratio without considering its composition.

 Cash flow statement - analyzes changes in cash and cash equivalents during the period.

Purposes/Functions of Cash Flow Statement

1. It provides relevant information about the cash receipts and cash payments of the

enterprise as of a given period.

2. It states the changes in the financial position of the firm.

3. It presents information on the structural health, liquidity, and profitability of the firm.

4. It gives insights on the different activities of the firm.

5. It determines the capability of the firm to produce cash and cash equivalents.

Main Sections of the Statement of Cash Flows

1. Cash flows from operating activities - These are the cash flows derived from

revenue-producing activities of the enterprise. They are the results of transactions and

other events that are factored to determine net income or loss.

INFLOWS

• Cash receipts from sales of goods or services, including receipts from collections or

sale of accounts and both short – and long-term notes receivable from customers

arising from those sales.

• Cash receipts from returns on loans, other debt instruments of other entities, and equity

securities – interest and dividends

• All other cash receipts that do not stem from transactions defined as investing or

financing activities, such as refunds from supplies, amounts received to settle lawsuits,

and proceeds of insurance settlements (except for those that are directly related to

investing or financing activities, such as from destruction of a building).

OUTFLOWS

• Cash payments to acquire materials including principal payments on accounts and both

short- and long – term notes payable to suppliers.

• Cash payments to other supplies and employees for other goods or services

• Cash payments to governments for taxes, duties, fines, and other fees for penalties

• Cash payments to lenders and other creditors for interest

• Other cash payments that do not stem from transactions defined as investing or

financing activities, such as payments to settle lawsuits, cash contributions to charities,

and cash refunds to customers

Cash flows from investing activities - This section reflects how much money the company

has received or lost from its investing activities.

INFLOWS

• Receipts from collection on loans receivable

• Receipts from sales of other entities debt instruments previously purchased

• Receipts from sales of equity instruments of other enterprises and from returns of

investment in those instruments

• Receipts from sales of property, plant and equipment, and other productive assets

OUTFLOWS

• Disbursements for loans granted

• Disbursements for the purchase of debt instruments of other entities (other than cash

equivalents and certain debt instruments acquired specifically for resale)

• Payments to acquire equity instruments of other enterprises

• Payments at the time of purchase or soon before or after purchase to acquire property,

plant and equipment, and other productive assets.

3. Cash flow from financing activities - This section of the cash flow statement presents

the inflow of cash coming from financing institutions or issuance of shares of stocks,

outflow of cash when the firm pays its long-term loan, or when the board of directors

declared dividends.

INFLOWS

• Issuance of long-term obligations such as bonds payable, mortgage payable, and

long-term notes payable

• Proceeds from issuing equity instruments

OUTFLOWS

• Payments of dividends or other distributions to owners, including outlays to reacquire the

enterprises equity instruments

• Other applications are the purchase of treasury stock and the redemption of preferred

stock, both of which require the payment of cash.