Accounting for Financial Modeling

Introduction to Cash Flow Statement

 Financial Statements
Financial statements are reports that summarize important financial information about a company

Income Statement Balance Sheet Statement of

Cash Flows

Revenue Assets Operating

Expenses Liabilities Investing

Profit (Loss) Equity Financing

 Cash Flow Statement
Cash flow statement (CFS) shows a company’s cash flow over a particular period of time

Cash beginning balance + change in cash during the period = Cash ending balance

CFS shows whether the company is generating or using cash in its business activities

Income statement and CFS complement each other when it comes to the financial analysis
Income statement is based on accrual accounting and is always different from cash flow
 Cash Flow Statement

Indirect Method Direct Method

Net Income Cash Receipt from Customers
+ Non-cash expenses
Cash Paid to Suppliers
- Increase in operating assets (Employees)
+ Increase in operating liabilities
Cash From Operations
Cash from operations
 Cash Flow
Statement
Net income - source of funds (+)
Cash from Operations Increase in operating assets - use of funds (-)
Increase in operating liability - source of funds (+)

Capex (increase in long-term assets) - use of funds (-)

Cash from Investing
Asset sale (decrease in long-term assets) - source of funds (+)

Debt issue (increase in financial liabilities) - source of funds (+)

Cash from Financing
Debt repayment (decrease in financial liabilities) - use of funds (-)
Accounting for Financial Modeling

Cash Flow Statement Example

 CFS Example
1. Company generated 100 in net income in year 1;
Year 1
Net income 100
2. Company recorded PP&E depreciation of 50 and impairment
Depreciation 50
of 10 in year 1 (impairment charge is related to intangible asses);
Impairment 10
Change in accounts receivable (10)
3. At the begging of year 1, accounts receivable was 15 and at
Change in accounts payable 20
the end of year 1, accounts receivable was 25;
Cash from operations 170

4. At the begging of year 1, accounts payable was 25 and at the Purchase of PP&E (100)
end of year 1, accounts payable was 45; Cash from investing activities (100)

5. At the begging of year 1, PP&E was 100 and at the end of Purchase of company stock (50)
year 1, PP&E was 150; Cash from financing activities (50)

6. Company repurchased 50 worth of its shares in year 1; Net change in cash 20

Cash beginning balance 100
7. Company’s cash balance was 100 at the beginning of year 1; Cash ending balance 120

8. Determine cash balance at the end of year 1.

 Financial Statements Integration
net income

Cash Flow Statement Balance Sheet Income Statement

Assets

Cash Balance

net income

Liabilities

Equity

Retained Earnings