Lecture 04:
Chapter 04: Statement of Cash flow and Free Cash Flow
Cash is KING.
Utility < Purchasing power
Evaly
Balance Sheet
2020 31 dec
Cash 100,000
How much cash did Evaly generate in year 2020?
Cash is an asset; current asset; it signifies our liquid position
o Liquidity gives the ability to be flexible and adaptive
Financial Statements:
o Income Statement (sales – expense = net profit; for a given period)
o Balance Sheet (asset = liabilities + equity)
Balance sheet does not provide you a period picture, rather it
provides you with a cumulative picture. All the accounts reported in
balance sheet are permanent. We don’t close out any account at the
end of the period.
o Statement of Cash flow (cash inflows and outflows; for a given period)
Assets are reported in which statement: Balance Sheet
Evaly
Cash 2017 2018 2019 2020 (31st
Dec)
30,000 150,000 90,000 100,000
++++++---- - - - - - - - ++++------+++++------ = net outcome of cash in 2020 +10,000
All cash out flow: use of cash (impact on cash: negative)
All cash inflow = source of cash (impact on cash: positive)
Statement of Cash flow
This statement is created on a periodic basis
All the information is for a given period.
Net Cash flow from Operations, Net Cash flow from investments, Net Cash flow from
Financing; NCFO+NCFI+NCFF = Net changes in Cash flow in that year.
Operations, Investment, Finance
E valy: +1000crore
We have divided all uses and sources of cash in 3 broad categories :
Operations
Finance
Investment
Asset: Debt:
Cash +15 lac -500,000 -200,000 BRAC: 500,000
Espresso machine 500,000
Oven 200,000
Equity: 400,000 + 600,000
There are 3 main sources of cash floes (inflow & outflow):
Operation:
o The cash transaction occurring from operations: sales and
all different other types of operational expenses.
Inflow: Sales, other gains, other revenues
Outflow: OPT exp: COGS, salaries, utility bills, tax
etc…
Net profit is the difference of operational inflows
and operational outflows
Investment:
o Cash related to buying fixed assets. Money required for
investment in accounting terms is known as capital
o expenditure/investment falls under this category. The
money that you spend to buy fixed assets
Outflows: buying assets (fixed)
Inflow: Sell a fixed asset that you owned.
Finance:
o The money provided by capital providers that a firm uses
to invest in various assets that are required to operate
the business
Inflow: Taking loan, issuing shares, issue bonds
Outflow: dividend, payback of loans, buyback
shares
Statement of Cash Flows
There 3 sections in a statement of cash flow:
1. Cash flow from Operating Activities (foundation: income statement)
a. Direct method
b. Indirect method
2. Cash flow from Investment Activities (foundation: Balance sheet – L.H.S -Assets)
3. Cash flow from Financing Activities (foundation: Balance sheet – R.H.S -debt &
equity)
The main purpose of creating this statement is to report the CASH balance/transaction of
my company. So, my focus will be on cash only.
Use of Cash (outflow): subtract Sources of Cash (inflow): add
Net loss Net profit
Non-cash earnings Depreciation and other non-cash
Any Asset increase expenses
Liabilities decrease Asset decrease
Equity decrease (buying back) Liabilities increase
Cash dividend Equity increase (issuing shares)
Sales – COGS – Depreciation exp = Opt Profit – int = taxable income - tax = NP
Taxable income 100; low sales or high expense
Tax 20%: tax exp 20 = 20% of 100
Sales 1000, Dep exp 20
NP = 150 + dep 20 = 170
Dep exp is a non-cash expense.
Statement Prep:
1. CFO:
Net Profit + or Net Loss –
Add Depreciation
Subtract non cash earnings
Add decrease in CA
Subtract increase in CA
Add increase in CL
Subtract decrease in CL
Net CF from Operations
2. CFI:
Changes in Gross Fixed Asset
If Gross FA goes up –
If Gross FA goes down +
Ending Gross Fixed assets – Beginning Gross Fixed Assets
Equipment beg 10,000>>>>>>>.ending 12,000
Equipment 10,000
- ACMLT Dep 2000
= Net Equipment
3. CFF:
Add increase in L/T loans
Subtract Decrease in L/T loans
Add increase in new share issued
Subtract Decrease in equity (share buyback)
Subtract Cash dividend paid
FREE CASH FLOW
Earn/profit
Inflow vs outflow
Return vs Risk
A firm’s true return is FCF. What do I mean by true return? Return that is free of all
obligation. This amount is distributed among the capital providers of the company.
Capital Providers: 1) shareholders 2) lenders
Return: Net Profit 100
Still company needs to spend 20 taka to buy an equipment. And the company decided to
use profit proceedings to finance that equipment purchase.
In order to sustain and survive and flourish, a company needs to spend money in 3 different
sections. We can categorize these expenditures in 3 obligations:
Operational
o Sales is your operational inflow
o COGS, OPT:;::::operational outflows
Net Profit
In that case, NP is my net operational cashflow/earnings
Growth obligation
o Long-term investment
Liquidity Obligations
o Invest working capital
o Investing in current assets: cash, A/r, inv, PE; net off my current liabilities
o Working Capital = CA – CL
o TKS: CA 100; CL 30
Return: Net Profit 100
Still company needs to spend 20 taka to buy an equipment. And the company decided to
use profit proceedings to finance that equipment purchase. 20 taka more they’ll keep as
cash reserve from the net profit.
Working capital
Free Cash Flow = OCF – NFAI – NWCI
OCF
o OCF = Net Profit + Interest + Depreciation or
o OCF = EBIT – Tax + Depreciation
NFAI
o Ending Gross FA – Beginning Gross FA
NWCI
o Ending Working capital – Beginning working capital
o Ending (CA – CL) – Beginning (CA -CL)
