Financial Reporting and Analysis

Lecture Topic

“Preparation of Financial
Statements"

Teacher:

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 INDUS UNIVERSITY

2
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Statement of Cash Flows
The statement of cash flows reveals the company's cash inflows and outflows
from operating, investing, and financing activities. It helps assess the
company's cash generation and management.

Summarizing Cash Inflows and Outflows

Categorizing Activities: Operating, Investing, Financing

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XYZ Corporation Cash Flow Statement
For the Year Ended December 31, 20XX
1. Operating Activities:
Net Income: $150,000 (Taken from the income statement)
Adjustments for Non-Cash Items:
Depreciation Expense: $30,000
Add back depreciation as it's a non-cash expense.
Increase in Accounts Payable: ($10,000)
Subtract the increase in accounts payable because it's a source of cash (you haven't paid these
expenses yet).
Decrease in Accounts Receivable: $5,000
Add back the decrease in accounts receivable because it represents cash received from customers.

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Operating Cash Flow Before Changes in Working Capital:
$150,000 (Net Income) + $30,000 (Depreciation) - $10,000
(Increase in Accounts Payable) + $5,000 (Decrease in
Accounts Receivable) = $175,000
Changes in Working Capital:
Increase in Inventory: ($20,000)
Subtract the increase in inventory because it's a use of cash.
Increase in Prepaid Expenses: ($2,000)
Subtract the increase in prepaid expenses because it's a use of cash.
Net Cash Provided by Operating Activities: $175,000
(Operating Cash Flow Before Changes in Working Capital) -
$20,000 (Increase in Inventory) - $2,000 (Increase in Prepaid
Expenses) = $153,000

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 2. Investing Activities:
Purchase of Property, Plant, and Equipment
(PPE): ($60,000)
Subtract the purchase of PPE because it's a use
of cash.
Net Cash Used in Investing Activities:
($60,000)
3. Financing Activities:
Issuance of Common Stock: $40,000
Add the issuance of common stock because it's
a source of cash.
Payment of Long-term Debt: ($20,000)
Subtract the payment of long-term debt
because it's a use of cash.

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 Payment of Dividends: ($10,000)
Subtract the payment of dividends because it's
a use of cash.
Net Cash Used in Financing Activities: $40,000
(Issuance of Common Stock) - $20,000
(Payment of Long-term Debt) - $10,000
(Payment of Dividends) = $10,000
Net Increase in Cash for the Year: $153,000
(Operating Activities) - $60,000 (Investing
Activities) + $10,000 (Financing Activities) =
$103,000
Cash Balance at the Beginning of the Year:
$50,000 (Taken from the beginning balance
sheet)
Cash Balance at the End of the Year: $50,000
(Beginning cash balance) + $103,000 (Net
increase in cash) = $153,000
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Faculty of Management Sciences, Indus University
Faculty of Management Sciences, Indus University
Statement of Changes in Equity
The statement of changes in equity outlines the changes in
shareholders' equity during a specific period, accounting for share
issuances, dividends, and changes in retained earnings.

Tracking Changes in Equity Components

Incorporating Net Income and Dividends

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Notes to the Financial Statements: Financial statements are
accompanied by explanatory notes that provide additional information about
accounting policies, significant transactions, and other relevant details.

Financial Statement Footnotes: Footnotes provide explanations

for complex accounting treatments, significant events, and risks. They help
users of financial statements understand the context behind the reported
numbers.

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Using Financial Ratios for Analysis
Introduction to Key Financial Ratios
•Liquidity
•Solvency
•Profitability
•Efficiency Ratios

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Importance of Consistency and Comparability
Ensuring Uniform Presentation of Financial Data
Facilitating Cross-Company and Industry Comparisons
Financial statements should be presented in a clear,
logical, and consistent format. Effective presentation
enhances readability and facilitates easy analysis.

Faculty of Management Sciences, Indus University