Master in Senior Management

2310
Financial management
Juan Cerón

Cash Flow Statement

Index

01. Introduction
02. Structure of Cash Flow Statement
03. Example
04. Relationship with Balance sheet and Income statement

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01. Introduction

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01. Introducción
PROBABLY, CASH IS THE KING IN ANY BUSINESS
• The Income statement doesn’t inform us about the cash available, because it uses the
accrual method. But the accounting profit does not pay bills, dividends, or investments …
• And businesses need real money to pay bills, wages or the interests on a loan.
• Other movements in cash such as the acquisition of fixed assets are not recognized in the
Income statement.
• That is why a record of cash movements is needed.
• The report on the sources and uses of cash during a specific period is the Cash Flow
Statement. It is a complement to the Balance sheet and the Income statement.
• The objective is to explain changes in the cash balance rather than to measure the health
or value of the firm.

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01. Introducción
Example to see the difference between accrual approach and cash approach.
A firm pays $100 in period 1 for raw materials to produce some goods. It sells those goods for $150 in period 2
but does not collect payment from its customers until period 3. Calculate the cash flows to the firm in each
period by completing the following table. Do the resulting values for net cash flow in each period make sense?

Period 1 2 3
Sales

Change in accounts receivable

Cost of goods sold

Change in inventories

Net cash flow

From Brealey & Myers & Marcus, Fundamentals of Corporate Finance. Third Edition

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02. Structure of Cash Flow statement

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02. Structure of Cash Flow Statement
Cash Flow statement = +/- Operating cash flow
+/- Investments cash flow
+/- Financing cash flow
= Net change in cash balance

Cash at the beginning ± net change in cash balance = Cash at the end

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02. Structure of Cash Flow Statement
• Operating cash flow:
• It measures the cash generated by a company from its normal activities.
• Investments cash flow:
• Acquisition of fixed assets and other assets (cash outflow)
• Sale of fixed assets and other assets (cash inflow)
• Financing cash flow:
• Issuance of new shares or new debt (cash inflow)
• Debt repayment and share buyback (cash outflow)

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02. Structure of Cash Flow Statement
IFRS (International Financial Reporting Standards):

 Interest and dividend paid can be recorded either as an operating activity or

as a financing activity.

 Interest and dividend received can be classified either as operating activities

or as investing activity.

 Tax paid is an operating cash flow.

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02. Structure of Cash Flow Statement
Operating cash flow is the first and usually the main source of cash.
If operating cash flow is not enough, other sources of money are required to
cover the cash needs.
For example, selling non-current assets (investments cash flow), issuing new
debt or new shares (financing cash flow).
In a long-term perspective, operating cash flow is the only reliable and
sustainable source to cover cash needs.

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02. Structure of Cash Flow Statement
• Operating cash Flow is often also known simply as Cash Flow.
• It can be measured directly, recording cash in and cash out related to the company’s
normal business, or indirectly, by starting with net income and making some
adjustments in order to get the cash flow.
• Adjustments: Revenues and expenses that do not affect cash.
• The majority uses indirect approach.

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02. Income statement presentation
+Net sales
-Cost of goods sold
=Gross profit
-Wage expense
-Other operating costs (utilities, rents)
-Depreciation
= Operating profit = Earnings before interest and taxes (EBIT)
-Interest expenses
-Interest revenues
+/- Other income
=Income before taxes
-Taxes
= Income after tax
-Minority interest
= Net income
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02. Structure of Cash Flow Statement
Adjustments:

Depreciation
It is not a cash outlay, so add back to net income to obtain cash flow.

Inventories
If Inventories increase, means that the company has invested in raw materials or finished goods. And that is a cash outflow.
The opposite also is true.

Accounts receivable
If Accounts receivable increase, means that the company is financing its customers, and this is cash going out. The opposite
also is true.

Accounts payable
If Account payable increases, means that suppliers are financing the company, and this is a cash coming in. The opposite also
is true.

Depreciation is shown in the income statement and the other three in the balance sheet.
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Operating cash
flow measured
directly

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 Inditex
Consolidated
statement of cash Operating cash
flows flow measured
indirectly

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Inditex: Operating cash Flow measured indirectly

2021 2020

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02. Structure of Cash Flow Statement

General Motors Company and

subsidiaries
Consolidated statement of
cash flows

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02. Structure of Cash Flow Statement
Cash in or Cash out? Operating, investment or financing?
= Op. Inv. Fin.
• Purchasing of raw materials, paid in cash.

• Reduction in accounts payable

• Issuance of new shares, paid in cash.

• Acquisition of new equipment, paid in cash

• Sale of products on credit

• Sale of a machine to a bank, which is immediately leased for 20 years.

• Buyback of 1 million shares.

• Customers pay a debt they had pending

• Payment of a dividend to shareholders

• The firm get a loan from a bank

• The firm pays the income tax

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03. Example

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03. Example
1. A company has been established with 10000€, paid in cash

Assets = Liabilities + Owners’ Equity

Cash Common stock

+10.000 +10.000

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03. Example
ASSETS LIABILITIES + EQUITY
Cash + Other CA + NCA = Liabilities + (Equity + Profit)
+10.000 +10.000

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03. Example
2. A bank gives us a long-term loan for 3.000 €

Assets = Liabilities + Owners’ Equity

Cash Long-term debt

+3.000 +3.000

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03. Example
ASSETS LIABILITIES + EQUITY
Cash + Other CA + NCA = Liabilities + (Equity + Profit)
+10.000 +10.000
+3.000 +3.000

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03. Example
3. We purchase machinery for 5.000 €, paid in cash

Assets = Liabilities + Owners’ Equity

Cash Non-current asset

-5.000 +5.000

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03. Example
ASSETS LIABILITIES + EQUITY
Cash + Other CA + NCA = Liabilities + (Equity + Profit)
+10.000 +10.000
+3.000 +3.000
-5.000 +5.000

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03. Example
4. We provide services to a customer for 12.000 €. The customer pays 8.000 € in cash and the remainder will
be paid later

Assets = Liabilities + Owners’ Equity

Cash Receivables Net income

+8.000 +4.000 +12.000

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03. Example
ASSETS LIABILITIES + EQUITY
Cash + Other CA + NCA = Liabilities + (Equity + Profit)
+10.000 +10.000
+3.000 +3.000
-5.000 +5.000
+8.000 +4.000 +12.000

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03. Example
5. The expenses for the year (labor costs, interest expenses, utilities and other expenses) amount 9.000
€, paid in cash.

Assets = Liabilities + Owners’ Equity

Cash Net income

-9.000 -9.000

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03. Example
ASSETS LIABILITIES + EQUITY
Cash + Other CA + NCA = Liabilities + (Equity + Profit)
+10.000 +10.000
+3.000 +3.000
-5.000 +5.000
+8.000 +4.000 +12.000
-9.000 -9.000

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03. Example
6. We pay dividends for 1.000 €

Assets = Liabilities + Owners’ Equity

Cash Net income

-1.000 -1.000

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03. Example
ASSETS LIABILITIES + EQUITY
Cash + Other CA + NCA = Liabilities + (Equity + Profit)
+10.000 +10.000
+3.000 +3.000
-5.000 +5.000
+8.000 +4.000 +12.000
-9.000 -9.000
-1.000 -1.000
+6.000 +4.000 +5.000 +3.000 +10.000 +2.000

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03. Example FINAL BALANCE SHEET
Euros

EQUITY +
ASSETS Euros Euros
LIABILITIES

NON-CURRENT
5.000 EQUITY 12.000
ASSETS
CURRENT ASSETS 10.000 Common stocks 10.000
Receivable 4.000 Retained earnings 2.000
Cash 6.000 LIABILITIES 3.000
Long term debt 3.000

Total Equity +
Total Assets 15.000 15.000
Liabilities

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03. Example
P & L STATEMENT

Revenues: services provided 12.000

Expenses: wages, interests, other expenses 9.000

Net income: 3.000

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 03. Example
ASSETS LIABILITIES + EQUITY
Cash + Other CA + NCA = Liabilities + (Equity + Profit)
(1) +10.000 +10.000
(2) +3.000 +3.000
(3) -5.000 +5.000
(4) +8.000 +4.000 +12.000
(5) -9.000 -9.000
(6) -1.000 -1.000
+6.000 +4.000 +5.000 +3.000 +10.000 +2.000

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03. Example
CASH FLOW STATEMENT (Direct method for Operating cash Flow)

Operating cash flow:

Cash in for services provided (4) 8.000
Payment for expenses (5) -9.000
Operating cash flow -1.000
Investment activities:
Purchase of equipment (3) -5.000
Cash Flow from investment activities -5.000
Financing activities:
Shares issuance (1) 10.000
Loan (2) 3.000
Dividends (6) -1.000
Cash Flow from financing activities 12.000
Net cash Flow for the period 6.000

Cash at the beginning 0

Cash at the end 6.000
Change in cash balance 6.000

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03. Example
CASH FLOW STATEMENT (Indirect method for Operating cash Flow)

Operating cash flow:

Net income (4) 3.000 Recall: in this
Adjustments (Rise in account receivable) (5) -4.000 example there is
Operating cash flow -1.000
not depreciation
Investment activities:
Purchase of equipment (3) -5.000
Cash Flow from investment activities -5.000
Financing activities:
Shares issuance (1) 10.000
Loan (2) 3.000
Dividends (6) -1.000
Cash Flow from financing activities 12.000
Net cash Flow for the period 6.000

Cash at the beginning 0

Cash at the end 6.000
Change in cash balance 6.000

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04. Relationship with Balance Sheet and Income
statement

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 To do in excel

04. Relationship with Balance sheet and Income statement

Data from a distributor of TV and video equipment

Income statement Balance sheet Cash flow statement

2009 2009 2008 2009
Sales 2200 Current assets: Cash flow from operating activities
Cost of goods sold 1644 Cash 25 20 Net income
Other operating expenses 411 Marketable securities 25 0 Depreciation
EBITDA 145 Accounts receivable 150 125 Change in accounts receivable
Depreciation 20 Inventory 125 130 Change in inventories
EBIT 125 Total current assets 325 275 Change in accounts payable
Interest 5 Non-current assets: Cash flow from operating activities
Pretax income 120 Gross investment 350 320
Tax at 50% 60 Less accumulated depreciation 100 80 Cash flow from investing activities
Net income 60 Total non-current assets 250 240 Investment in non-current assets
Total assets 575 515
Dividend 30 Cash flow from financing activities
Retained earnings 30 Current liabilities Dividends
Short-term debt 0 25 Purchase of marketable securities
Accounts payable 135 110 Increase (decrease) in log-term debt
Total current liabilities 135 135 Increase (decrease) in short-term debt
Long-term debt 90 60 Cash flow from financing activities
Owners equity 350 320
Total liabilities and equity 575 515 Change in cash balance

Preparing the cash flow statement

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Several accounts and financial statements
Balance Sheet, Income Statement or Cash Flow Statement?
BS IS CF
• Cash and cash equivalents

• Personnel expenses

• Dividends paid

• Income tax

• Deferred tax liabilities

• Depreciation

• Cash received from operations

• Goodwill

• Cost of goods sold

• Repayments of loans

• Retained earnings

• Payments relating to investments in property, plant and equipment

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