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CASH FLOW ANALYSIS
Accrual or Cash basis Accounting?
Example: A three year business project
Purchase of goods on credit in year X0
100
Selling expenses paid in cash (year X0)
50
Sales revenue
500
Suppliers due (credit period in months)
12
Customers (credit provided, in months)
24
3-year results
Earnings
Cash basis
Accrual basis
year
Χ0 Χ1 Χ2
-50 -100 500
350
0
0
Remarks?
• High Profitability
• Cash shortage in X0 & X1
Total
350
350
The Importance of adequate cash flows:
Shortage of Cash

Failure to pay liabilities due

Bankruptcy
Cash Items
GAS
IAS
1. Cash
1. Cash
2. Deposits
2. Deposits
3. Interest coupons due
3. Interest coupons due
4. Cash equivalents
Statement of Cash flows: Importance
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•
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Liquidity
Solvency
Earnings Quality
Financial flexibility
Forecast of future earnings & cashflows
Statement of Cash Flows
• Cash Flows derive (either/or) from
Operating activities – CF(OA)
Investing activities – CF(IA)
Financing activities – CF(FA)
• Analysis of changes in Cash Balance
Algorithm of Cash Flow Statement
OA receipts
- payments
= CF(OA)
IA
receipts
- payments
= CF(IA)
FA receipts
- payments
= CF(FA)
=
Net Cash Flow
ΧΧΧ
Cash Flows
a. Operating Activities
• Major source of cash
• Related to working capital accounts
b. Investing Activities
• Fixed assets, investments, securities
c. Financing Activities
• Equity, Loans, Dividends, etc
Cash Flows and Business Cycles
entry
develop mature decline
OA
-3
7
15
8
IA
-15
-12
-8
-2
FA
18
5
-7
-6
0
0
0
0
Total
PREPARING THE CF STATEMENT
• Direct method
Possible only internally within the firm
Detailed information
• Indirect method
For external users
IAS No 7
1. Operating activities: direct method
Receipts from
• Tax return
• Interest income
• dividends
• customers
• advances
• receivables
Payments to
• suppliers
• wages
• Interest (debt &
leasing)
• tax
• expenses
• Accounts payables
Operating Activities: Indirect Method
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•
•
•
•
Net Earnings
+ Non Cash Expenses (Depreciation )
- Non Cash Income
- Profit from fixed assets & securities sold
+ Loss from fixed assets & securities sold
(continued next)
12
Operating Activities: Indirect Method
(continued)
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•
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- Increase in Current Assets
+ Decrease in Current Assets
+ Increase in Short-term Liabilities
- Decrease in Short-term Liabilities
= Cash Flow from operating activities
13
2. Investing Activities
Receipts from
• Fixed assets sold
• Investments &
securities sold
• Debt provided
installments
• Fixed assets
compensations
Payments for
• Fixed asset purchase
• Investments &
securities purchase
• Loans provided
• Capitalized interest
expense
3. Financing Activities
Receipts from
• Loans
• Share capital
increase
Payments for
• Share capital refunds
• Loan installments
• Leasing installments
• dividends
Accounting data required for CFS
•
•
•
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Two consecutive Balance Sheets
Income Statement
Statement of Shareholders’ Equity
Appendix and information about:
Changes in fixed assets, revaluations
Changes in Equity
Pitfalls in CFS preparation
• Transactions affecting two activities,
e.g. fixed assets sold:
Eliminating profit or loss from Net
Earnings and Operating Activities
Amount received to be recorded in
Investment Activities
CASH FLOW ANALYSIS
Operational Activities
• Normal source of cash
• Efficient Management
• OA are positive, except:
In high growth rates
Recession
• Deficit is covered by CF from IA or FA
Methods of Analysis for CF(OA)
• In relation to liquidity & capital
structure ratios
• In relation to other similar firms
• Regularity - Trend
• In relation to the life cycle of the
product or the firm
Management of CF(OA)
Increase with:
• Strict credit policy to customers
• Reduced inventories held by:
Production re-engineering
Supply chain management (JIT)
• Expansion of short-term liabilities (?)
CF(OA) Analysis
• CF(OA) > Current Liabilities  Financial
Strength
• High CF(OA) / Net Earnings  Earnings
quality
• Increase rate of CF(OA)
relates to share value & risk
• Unsuitable for Return measurement
Cash Flow from Investing Activities
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•
•
•
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Reveals growth or shrinkage
Affect on future earnings & CF(OA)
Consider replacement of old fixed assets
Consider maturity of securities
Consider strategic investments: (business
concentration or expansion?)
• Over expansion may threat solvency
Cash Flow from Financing Activities
Benefits from Debt capital:
• Tax reduction from interest expense
• Financial Leverage
Optimal Relationship of Equity & Debt
• ROE > ROTA
• Loan repayment with Free Cash Flows
FREE CASH FLOWS – (FCF)
ορισμός:
• FCF=CF(OA) – capital maintenance – loan
repayment
• Available cash flow above necessary needs
• Accurate calculation of CFC internally only
Uses of Free Cash Flows
• Dividend payment
• Extended investments
Temptation with high FCF
• Low productivity investments
Luxury assets & spending
High administration or R&D expenses