Ignacio Lezaun

English edition
2021

Fundamentals of Finance
Contents of the course

1. The role of the Chief Financial Officer

2. Statement of cash flows
3. Working capital management I
4. Working capital management II
5. Short-term finance instruments
6. The time value of money
7. Conclusions
 UNIT
2

Unit 2:
Statement of cash flows
OBJECTIVES UNIT
2

2.1 Understand differences between net income and cash flow:

a. Revenue and collections
b. Expenses and payments

2.2 Calculating cash flow

c. Direct versus indirect method
d. Calculating cash flow activities
e. Cash flow statement
f. Exercise

2.3 Cash flow metrics and calculations

g. EBIDTA as a proxy
h. Operating cash flow
i. Free Cash Flow (FCF)
j. Free Cash Flow to Firm (FCFF)
k. Free Cash Flow to Equity (FCFE)
l. Exercise
Cash flow statement: Amazon example
(+/-) CASH FLOWS FROM OPERATING ACTIVITIES

(+/-) CASH FLOWS FROM INVESTMENT ACTIVITIES

Cash flow for the period
(+/-) CASH FLOWS FROM FINANCING ACTIVITIES
Recap

UNIT
2
Recap

UNIT
2
Class exercise: Laserlus company

GROSS ASSETS
31/12/20
150,000.00 €
31/12/21
150,000.00 € CAPITAL
31/12/20
120,000.00 €
UNIT
31/12/21
120,000.00 €
DEPRECIATION
NON-CURRENT
-30,000.00 € -35,000.00 € RESERVES 18,000.00 € 2 21,600.00 €
ASSETS 120,000.00 € 115,000.00 € NET INCOME 6,000.00 € 7,500.00 €
INVENTORIES 18,500.00 € 5,000.00 € NET EQUITY 144,000.00 € 149,100.00 €
CUSTOMERS 38,000.00 € 20,000.00 € NON-CURRENT LIABILITIES -€ -€
CASH 24,900.00 € 33,975.00 € SUPPLIERS 15,000.00 € 4,125.00 €
CURRENT ASSETS 81,400.00 € 58,975.00 € TAXES PAYABLE 2,400.00 € 750.00 €
OTHER DEBTS 40,000.00 € 20,000.00 €
CURRENT LIABILITIES 57,400.00 € € 24,875.00
TOTAL ASSETS 201,400.00 € 173,975.00 € TOTAL EQUITY + LIABILITIES 201,400.00 € 173,975.00 €

INCOME STATEMENT 2021

Sales 120,000.00 € Exercise: 30/12/21-selling of an Asset:
Cost of materials (30,000.00 €) Gross Asset: 50,000.00 €
Direct labor cost (37,500.00 €) Depreciation: -10,000.00 €
Indirect costs (35,000.00 €) Selling price: 44,000.00 €
Depreciation (5,000.00 €) Payment method: cash
Gross margin 12,500.00 €
General expenses (2,000.00 €) 1. Prepare new Balance Sheet and Income
EBIT 10,500.00 € Statement considering the transaction
Interests (500.00 €) (assume no tax impact)
EBT 10,000.00 € 2. Present the impact of the transaction on the
Tax (2,500.00 €) Cash Flow Statement of the company
Net Income 7,500.00 €
Class exercise: Laserlus company (solution 1.)
1. Prepare new Balance Sheet and Income Statement considering the transaction (assume
no tax impact)
GROSS ASSETS
31/12/20
150,000.00 €
31/12/21
100,000.00 € CAPITAL
31/12/20
120,000.00 €
UNIT
31/12/21
120,000.00 €
DEPRECIATION
NON-CURRENT
-30,000.00 € -25,000.00 € RESERVES 18,000.00 € 2 21,600.00 €
ASSETS 120,000.00 € 75,000.00 € NET INCOME 6,000.00 € 11,500.00 €
INVENTORIES 18,500.00 € 5,000.00 € NET EQUITY 144,000.00 € 153,100.00 €
CUSTOMERS 38,000.00 € 20,000.00 € NON-CURRENT LIABILITIES -€ -€
CASH 24,900.00 € 77,975.00 € SUPPLIERS 15,000.00 € 4,125.00 €
CURRENT ASSETS 81,400.00 € 102,975.00 € TAXES PAYABLE 2,400.00 € 750.00 €
OTHER DEBTS 40,000.00 € 20,000.00 €
CURRENT LIABILITIES 57,400.00 € € 24,875.00
TOTAL ASSETS 201,400.00 € 177,975.00 € TOTAL EQUITY + LIABILITIES 201,400.00 € 177,975.00 €

INCOME STATEMENT 2021

Sales 120,000.00 € Exercise: 30/12/21-selling of an Asset:
Cost of materials (30,000.00 €) Gross Asset: 50,000.00 €
Direct labor cost (37,500.00 €) Depreciation: -10,000.00 €
Indirect costs (35,000.00 €) Selling price: 44,000.00 €
Depreciation (5,000.00 €) Payment method: cash
Gross margin 12,500.00 €
General expenses (2,000.00 €)
1. Prepare new Balance Sheet and Income
Result from disposal of Non-current Assets 4,000.00 €
EBIT 14,500.00 € Statement considering the transaction
Interests (500.00 €) (assume no tax impact)
EBT 14,000.00 € 2. Present the impact of the transaction on the
Tax (2,500.00 €) Cash Flow Statement of the company
Net Income 11,500.00 €
Class exercise: Laserlus company (solution 1.)
1. Prepare new Balance Sheet and Income Statement considering the transaction (assume
no tax impact)
GROSS ASSETS
Pre
150,000.00 €
Post
100,000.00 € CAPITAL
Pre
120,000.00 €
UNIT
Post
120,000.00 €
DEPRECIATION
NON-CURRENT
-35,000.00 € -25,000.00 € RESERVES 21,600.00 € 2 21,600.00 €
ASSETS 115,000.00 € 75,000.00 € NET INCOME 7,500.00 € 11,500.00 €
INVENTORIES 5,000.00 € 5,000.00 € NET EQUITY 149,100.00 € 153,100.00 €
CUSTOMERS 20,000.00 € 20,000.00 € NON-CURRENT LIABILITIES -€ -€
CASH 33,975.00 € 77,975.00 € SUPPLIERS 4,125.00 € 4,125.00 €
CURRENT ASSETS 58,975.00 € 102,975.00 € TAXES PAYABLE € 750.00 750.00 €
OTHER DEBTS 20,000.00 € 20,000.00 €
CURRENT LIABILITIES € 24,875.00 € 24,875.00
TOTAL ASSETS 173,975.00 € 177,975.00 € TOTAL EQUITY + LIABILITIES 173,975.00 € 177,975.00 €

INCOME STATEMENT Pre Post

Sales 120,000.00 € 120,000.00 € Exercise: 30/12/21-selling of an Asset:
Cost of materials (30,000.00 €) (30,000.00 €) Gross Asset: 50,000.00 €
Direct labor cost (37,500.00 €) (37,500.00 €) Depreciation: -10,000.00 €
Indirect costs (35,000.00 €) (35,000.00 €) Selling price: 44,000.00 €
Depreciation (5,000.00 €) (5,000.00 €) Payment method: cash
Gross margin 12,500.00 € 12,500.00 €
General expenses (2,000.00 €) (2,000.00 €)
1. Prepare new Balance Sheet and Income
Result from disposal of Non-
current Assets - 4,000.00 € Statement considering the transaction
EBIT 10,500.00 € 14,500.00 € (assume no tax impact)
Interests (500.00 €) (500.00 €) 2. Present the impact of the transaction on the
EBT 10,000.00 € 14,000.00 € Cash Flow Statement of the company
Tax (2,500.00 €) (2,500.00 €)
Net Income 7,500.00 € 11,500.00 €
Class exercise: Laserlus company (solution 2.)
2. Present the impact of the transaction on the Cash Flow Statement of the
company

+ 14,000.00 €

- 4,000.00 €

+ 44,000.00 €

• e) and f) eliminate profit/loss from operations • Cash-in from the sale of the asset
that must be classified as investment or
financing
CASH FLOWS FROM FINANCIAL
ACTIVITIES
Indirect method
• Collections from the
acquisition by third parties
of securities issued by the
company or of resources
granted by financial
entities or third parties, in
the form of loans or other
financing instruments, as
well as payments made for
amortization or return of
the amounts contributed by
them.
 
• Payments to shareholders
as dividends will also
appear as cash flows from
financing activities.
C) CASH FLOWS FROM FINANCINGACTIVITIES Notes Year n Year n-1
9. Collections and payments for equity instruments
a) Issuance of equity instruments
b) Amortization of equity instruments
c) Acquisition of own equity instruments
d) Disposal of own equity instruments
e) Grants, donations and bequests received
10. Collections and payments for financial liability instruments
a) Issuance:
1. Obligations and similar securities (+)
2. Debts with credit institutions (+)
3. Debts with group companies and associates (+)
4. Other (+)
b) Return and amortization of:
1. Obligations and similar securities (-)
2. Debts with credit institutions (-)
3. Debts with group companies and associates (-)
4. Others (-)
11. Payments for dividends and remuneration of other instruments
heritage
a) Dividends (-)
b) Remuneration of other equity instruments (-)
12. Cash flows from financing activities
(+/- 9 +/- 10 -11)
Cash flow statement: Amazon example
(+/-) CASH FLOWS FROM OPERATING ACTIVITIES

(+/-) CASH FLOWS FROM INVESTMENT ACTIVITIES

Cash flow for the period
(+/-) CASH FLOWS FROM FINANCING ACTIVITIES
Cash flow statement: BBVA example
 UNIT
2

Exercise
Practical exercise: Laserlus company
◼ The following information about the company Laserlus SL is provided: UNIT
◼ Balance sheet for the years 2020 and 2021
2
◼ Profit and loss account for the year 2021

◼ The following information is also available:

◼ The tax rate that the company supports is 25%
◼ In March 2021, a dividend is paid to shareholders of 40% of the previous year's result
◼ During the year 2021, 70% of the Corporation Tax for the current year is paid
◼ Half of the loan is returned

◼ For the year 2021:

1. Calculate the Cash Flows from Operating Activities.
2. Calculate the Cash Flows from Investing Activities.
3. Calculate the Cash Flows from Financing Activities.
4. Check that the final treasury balance for the year 2021 is the sum of the final treasury balance for
the year 2020 plus the sum of the different previous cash flows.
Class exercise: Laserlus company

GROSS ASSETS
31/12/20
150,000.00 €
31/12/21
150,000.00 € CAPITAL
31/12/20
120,000.00 €
UNIT
31/12/21
120,000.00 €
DEPRECIATION
NON-CURRENT
-30,000.00 € -35,000.00 € RESERVES 18,000.00 € 2 21,600.00 €
ASSETS 120,000.00 € 115,000.00 € NET INCOME 6,000.00 € 7,500.00 €
INVENTORIES 18,500.00 € 5,000.00 € NET EQUITY 144,000.00 € 149,100.00 €
CUSTOMERS 38,000.00 € 20,000.00 € NON-CURRENT LIABILITIES -€ -€
CASH 24,900.00 € 33,975.00 € SUPPLIERS 15,000.00 € 4,125.00 €
CURRENT ASSETS 81,400.00 € 58,975.00 € TAXES PAYABLE 2,400.00 € € 750.00
OTHER DEBTS 40,000.00 € 20,000.00 €
CURRENT LIABILITIES 57,400.00 € € 24,875.00
TOTAL ASSETS 201,400.00 € 173,975.00 € TOTAL EQUITY + LIABILITIES 201,400.00 € 173,975.00 €

INCOME STATEMENT 2021

Sales 120,000.00 €
Cost of materials 30,000.00 €
Direct labor cost 37,500.00 €
Indirect costs 35,000.00 €
Depreciation 5,000.00 €
Gross margin 12,500.00 €
General expenses 2,000.00 €
EBIT 10,500.00 €
Interests € 500.00
EBT 10,000.00 €
Tax 2,500.00 €
Net Income 7,500.00 €