Sample Statement of Cash Flow

Content: Statement of Cash Flows

MELC: The learners:
1. Discuss the components and structures of a CFS ( ABM_FABM12-
If-10)
2. Prepare a SCF (ABM_FABM12-If-11)

Statement of cash flow provides information on the sources and utilization of cash during the
period.

Presentation of Statement of Cash Flow according to activities:

1. Operating activities - primarily result from transactions that affect income and expenses.
Example
a. Cash receipts from the sale of goods and the rendering of services.
b. Cash receipts from interest income.
c. Cash payments for purchases of inventory
d. Cash payments for expenses
2. Investing activities - primarily result from the acquisition and disposal of long-term assets and other a. Receipts from customers - derived from the following formula:
investments, like property, plant and equipment. Ending Accounts Receivable = Beginning Accounts Receivable + Net Sales – Collections
Example
a. Cash payments for the acquisition of PPE Therefore:
b. Cash receipts from sale of PPE Collections (receipts from customers) = Beginning Accounts Receivable + Net Sales
3. Financting activities - primarily result from transactions with the owner and from borrowings. or Net Revenue –Ending Accounts Receivable
Example
a. Cash receipts from investments of owner to the business.
b. Cash payments on drawings by owner.
c. Cash receipts on loans.
d. Cash payments on repayment of loans.

Type of Activity Nature of Transactions b. Payments to Suppliers and Employees – derived from the following formula:
Ending Accounts Payable and Ending Accrued Salaries Expense = Beginning Accounts Payable +
1. Operating activities Affect income and expenses Beginning Accrued Salaries Expense + Net Purchases + Salaries Expense - Payments
2. Investing activities Acquisition and disposal of PPE, long-term assets, and other investments
Therefore: Payments = Beginning Accounts Payable + Beginning Accrued Salaries Expense + Net
3. Financing activities Investment and drawings by owner and loan transactions Purchases + Salaries Expense – Payments
Tips:
The use of “for the” is that amounts in the CFS are those changes for the year only.
Differentiate the Direct and Indirect Approach of the CFS
Direct – The operating cash flow section of the CFS under the direct method would show each
major class of gross cash receipts and gross cash payments
Indirect – The operating cash flow section of the CFS under the indirect method will reconcile the
net income/loss of the company with the total cash flows generated/used in operating activities by
adjusting the net income/loss for effects of non-cash transactions
Direct Method Indirect Method
Cash flows from operating activ ities:
Cash flows from operating activities: Profit (loss)
Cash receipts from sale of good xx Non-cash items:
Cash paid for purchase of inventory (xx) Depreciation
Cash paid for salaries expense (xx) Gain on sale of equipment
Total
Cash paid for utilities expense (xx)
Changes in operating assets and liabilities:
Cash paid for interest expense (xx) Increase in accounts receivable
Net cash from operating activities xx Decrease in inventory
Increase in prepaid assets
Increase in accounts payable
Decrease in salaries payable
Net cash from operating activities
Content: Analysis and Interpretation of Financial Statements (Part 1)
MELC: The learners:
3. Define the measurement levels, namely, liquidity, solvency, stability,
and profitability. (ABM_FABM12-Ig-h-12)
4. Perform vertical and horizontal analyses of financial statements of a
single proprietorship.(ABM_FABM12-Ig-h-13)
Lesson 1: Financial Statement Analysis
Financial Statement Analysis is the process of evaluating risks, performance, financial
health, and future prospects of a business by subjecting financial statement data to computational
and analytical techniques with the objective of making economic decisions.
There are three kinds of FS analysis techniques:
xx
-Horizontal analysis
-Vertical analysis
-Financial ratios
xx
Comparability is one of the qualitative characteristics of a good financial statement it is the
(xx)
ability of the FS to create a basis and allow the identification of similarities and differences between
xx
the statements being compared.
(xx) Comparison Standards
xx 1. Intracomparability
(xx) A comparison of FS for the current period compared with the FS of prior or earlier period. It
xx will point out the areas for improvements and may be used as performance evaluation tools for
(xx) employees. It indicates increase/decrease of various aspects of the FS like net income, liabilities
xx and others. Example: The net income of ABC Company for current year 2016 is compared with the
net income of ABC Company in 2015.
2. Intercomparability
Deals with the comparative analysis of the company's FS against a direct competitor.
Example: The financial statements of Globe Telecom are compared to the financial statements of
Smart Telecom.
3. Industry Standard
Comparison of company's FS with the standard average of that certain industry. By looking
at industry’s averages as a whole instead on a per competitor basis, the process would negate the
seasonal fluctuations affecting the direct competitor. Example: The financial statements of Smart
Telecom are compared with the industry standards of telecom industry.
 Industry is a group of companies that are related based on their primary business activities. -For the SCI, the base amount is Net Sales.
Examples are the telecom company, garments industry, and shipping industry. • Balance of Account ÷ Total Sales.
• This will reveal how “Net Sales” is used up by the various expenses.
Basic Tools in Analyzing Financial Statements • Net income as a percentage of sales is also known as the net profit margin.
1. Horizontal Analysis/Trend Analysis • Example
Is a technique for evaluating series of financial statement data over a period of time with
the purpose of determining the increase or decrease that has taken place. This will reveal the
behavior of the account over time. Is it increasing, decreasing or not moving? What is the magnitude
of the change? Also, what is the relative change in the balances of the account over time?
-Horizontal analysis uses financial statements of two or more periods.
-All line items on the FS may be subjected to horizontal analysis.
-Only the simple year-on-year (Y-o-Y) grow this covered in this lesson.
-Changes can be expressed in monetary value (peso) and percentages computed by using the
following formulas:
• Peso change=Balance of Current Year-Balance of Prior Year
• Percentage change= (Balance of Current Year-Balance of Prior Year)/(Balance of Prior Year)
• Example: 2014 2015
Sales P 250,000 P 175,000
✓Peso change = P250,000 - P175,000 = P75,000
3. Financial ratio analysis - involves the computation of percentages or proportions using formulas.
✓Percentage change = (P250,000 - P175,000) / P175,000 = 42.86% This analysis is designed to emphasize the meaningful relationships between financial data.
Classification financial ratios:
1. Liquidity ratios - capacity of a company to pay its currently maturing obligations
Example
a.Working Capital = Current Assets - Current Liabilities
2. Vertical Analysis/Common-size Analysis b.Current Ratio = Current Assets ÷ Current Liabilities
Is a technique that expresses each financial statement item as a percentage of a base amount. c.Acid Test Ratio = Quick Assets ÷ Current Liabilities
-For the SFP, the base amount is Total Assets. *Quick Assets = Cash + Receivables + Trading Securities
• Balance of Account ÷ Total Assets.
• From the common-size SFP, the analyst can infer the composition of assets and the 2. Activity ratios (Asset management ratios) - provide a measure of how efficient a business is
company’s financing mix. utilizing its resources
a. Accounts Receivable Turnover Ratio = Credit Sales ÷ Accounts Receivable
• Example * It measures the frequency of conversion of the company’s Accounts Receivable to Cash

b. Collection Period = 365 days ÷ Accounts Receivable Turnover Ratio

* It is the usual number of days that it would take before the company would be able to collect
certain receivables

c. Inventory Turnover Ratio = Cost of Goods Sold ÷ Inventory

* It measures the number of times the company was able to sell its inventory

d. Days in Inventory = 365 days ÷ Inventory Turnover Ratio

* It measures the number of days will take before an inventory will be sold

e. Number of Days in Operating Cycle = Collection Period + Days in Inventory

* It measures how long it will take to transform its inventory back to cash
3. Leverage ratios (Debt management ratios) - provide a measure of the extent a business uses
debt financing or “leverage”
a.Debt ratio (Debt-to-Total Assets Ratio) = Total Liabilities/Total Assets
* measures the proportion of assets financed through debt

b. Equity ratio = Total equity/Total assets

* measures the proportion of assets financed through equity

c. Debt-to-Equity Ratio = Total Liabilities ÷ Total Equity

* indicate how much devbt is used to finance the assets relative
to the amount pertaining to the owners

d.Times Interest Earned Ratio = Earnings Before Interest and Taxes/Interest Expense

4. Profitability ratios - refers to the company’s ability to generate earnings

a. Gross Profit Ratio = Gross Profit ÷ Net Sales
* shows the relationship between sales and cost of goods sold

b. Net Profit Ratio = Net Income After Tax ÷ Net Sales

* measures profitability after considering all income and expenses

c. Operating Expenses to Sales Ratio = Operating Expenses ÷ Net Sales

d.Return on Investment Ratio

d.1. Return on Assets = Net Income After Tax ÷ Total Assets
d.2. Return on Equity = Net Income After Tax ÷ Total Equity

e. Asset Turnover Ratio = Net Sales ÷ Total Assets