Slide NHTC1119 - Cash Flows Management - 3credit - English - 2021 - Tran Tat Thanh

CASH FLOWS MANAGEMENT
Lecturer: Dr. Tran Tat Thanh

Tel: 0904282440
Email: trantatthanh@gmail.com
School: Banking and Finance

Web: www.sbf.neu.edu.vn
1
Q&A
PROFIT OR CASH FLOWS ???
KEEP YOUR EYE ON THE CASH, NOT ON

RECORDED PROFITS.
2
CASH IS KING!
Cash availability is the lifeblood of the organization.
Rob Reider
3
TIMETABLE
EXERCISE
CHAPTER CONTENT HOURS THEORY
PRESENT
1 Chapter 1: Introduction 4.5 3 1.5

Recepts and disbursements
2 Chapter 2: 9 5 4
management
3 Chapter 3: Planning cash flow 6 4 2
The models of cash flow
4 Chapter 4: forecasting 9 5 4
Mid-term test
The model of cash balance
5 Chapter 5: management and analyzing 6 4 2
cash balance
Cash flow management in
6 Chapter 6 3 2 1
multinational company
Cộng 37.5 23 14.5 4
Exam and group assignment
Attendance: 10%
Group assignment: 20%

Mid-term test: 20%
Final test: 50%
5
CHAPTER 1
INTRODUCTION TO CASH FLOWS MANAGEMENT
CHAPTER 1
INTRODUCTION CASH FLOWS MANAGEMENT
6
CHAPTER 1
INTRODUCTION CASH FLOWS MANAGEMENT
Cash flows basic
Target and process of cash flows planning
Content of cash flows management
Financial ratios and cash flows analysis
7
What is cash flow management?
Cash flow management is the process of tracking how

much money is coming into and going out of your
business.
This helps you spot trends, prepare for the future, and tackle
any problems with your cash flow.
It pays to practice cash flow management often to make sure
your business has enough money to keep running.
8
Cash flow or Cash
9
OBJECTIVES
Control and track the cash flows

Maximize capacity and use cash
Maximize revenue and minimize expense
Collect sales as quickly as possible
Use cash if necessary
Pay the creditors no earlier than the due date
Forecast fluctuations of cash flow;
Reserve an amount for daily payments.
Provide appropriate external funding sources
Efficient use of excess cash.
10
IMPORTANCE OF CASH FLOW MANAGEMENT
Business fail Bankuptcy

Avoid extended cash High advertising cost
shortages More investment capital
for new
projects/facilities
High level inventory
Lasting sales collected
11
OBJECTIVES
Cash Flow From Operations $

Receipts
Customer Invoices $80,500
Other $1,500
Disbursements
Employee Salaries -$45,000
Suppliers -$25,500
Other -$5,000
Net Cash Flow From Operations $6,500
Cash Flow From Investments
Equipment and Software Purchases -$5,500
Net Cash Flow From Investments -$5,500
Cash Flow From Financing
Loan Payments -$3,300
Shareholder Dividends -$5,000
Net Cash Flow From Financing -$8,300
Net Change in Cash Balance -$7,300
12
Acme, Inc. – Cash Flow Statement for the Year Ended Dec. 31, 2018
MANAGING CASH FLOW
IS A MANAGEABLE ACTIVITY
13
CASH FLOWS AND BUSINESS
PROFIT VERSUS CASH FLOW
EXAMPLE
Income statement of 123 company:
Prior Current Next Year

($$ in 000s) Year Year (projected)
Sales $ 12,002 $ 15,073 $ 20,292
Cost of goods sold 8,436 10,290 13,877
Other expenses 2,474 2,480 2,875
________ ________ ________
Operating profit $ 1,092 $ 2,303 $ 3,540
________ ________ ________
% of Sales 9.1% 15.3% 17.4%
________ ________ ________
14
PROFIT VERSUS CASH FLOW
EXAMPLE
The statement of cash flow of 123 company:

Beginning cash in bank $ 208,000
Collections 13,110,000
Addition to long-term debt 500,000
Inventory purchases (5,029,000)
Payroll (1,975,000)
Other manufacturing expenses (2,101,000)
Selling & administrative expenses (2,257,000)
Capital equipment purchases (1,608,000)
Taxes, interest and debt principal (940,000)
___________
Cash position at end of year $ (92,000)
___________
15
PROCESS
Planning
Purpose
Personel
Timetable
Content
Estimate cash flows
Managment model
Apply corporate governance model
Performance evaluation and limited

Solution for limited issues
Evaluate management performance
16
PROCESS
 Business activities Cash

Purchasing
Collection
 Record and manage
 Financial Account
Purchase
transactions receivabl
d material
e
 Purpose: Budget
optimization and
Sales Manufacturing
budget handling
Inventory
As slowly As quickly
as possible as possible
17
CONTENT
Estimate CASH INFLOWS
CASH
FLOWS Estimate CASH OUTFLOWS
MANAGEMENT
FORCAST cash flows

Build up BUDGETING optimization
18
CONTENT
Cash flows and the statement of cash flows

The statement of cash flows
Cash inflow
Cash outflow
Cash flow planning and forecasting

Forecast cash flows
Plan cash flows
Model of money management and budget

handling
Model
Budget handling
19
CASH INFLOWS
20
CASH INFLOWS
Receivables from the sale of goods and services

Interest on deposits from banks and investments
Investments by shareholders
21
CASH OUTFLOWS
Expenses for purchase of goods, raw materials in stock, tools,

fixed assets.
Payment for staff salaries
Payment of taxes
Expenditures on other purchases incurred.
22
RATIOS
The ability to meet payment through a group of

financial indicators that reflect cash flow and
solvency
Solvency ratios
Cash flows ratios
Expenses incurred when the enterprise cannot

ensure the solvency, thereby assessing the risk of
enterprise bankruptcy
Expense incurred
Bankruptcy ability
23
RATIOS
Sources of Cash Uses of Cash
Profits from operations Losses from operations

Borrowing Repayment of debt
Sale of equity Payment of dividends
Sale of assets Invetment/Acquistion of assets
Decrease in working capital Increase in working capital

(except cash) (except cash)
24
CONCLUSION
SALES ARE GOOD.

PROFITS ARE BETTER.
CASH IS BEST!
Cash flow management is the process from arising transactions,
recording, money arises, and processing the arising money.
The content of cash flow management includes determining
cash inflow and cash outflow, budget and cash flows
management models.
Evaluate cash flows management through solvency indicators
and making money from the business.
25
CHAPTER 2
Receipts and Disbursements
CHAPTER 2
26
CHAPTER 2
The statement of cash flows (Cash flow statement_CFS)
Cash flows of business
Working capital and demand of working capital
Cash cycle and business cycle
Case study
27
MAXIMIZE CASH IN,

MINIMIZE CASH OUT
28
1 ROLES OF STATEMENTS OF CASH FLOWS
29
1 2 3
Assess the Assess debt Explain the

affordability, reasons for the
ability to
dividend difference
generate cash between profit
flows in the payment and
additional and cash flow
future increase
capital needs
(decrease)
Purpose of Cash flow statement
Master the meaning of the statement of cash flows. Understand the requirements
of Vietnamese accounting standards and current regulations on presenting the
statement of cash flows
IAS07 and VAS24

Document
Usefulness and Format
Usefulness of the Statement of Cash Flows

Provides information to help assess:
1. Entity’s ability to generate future cash flows.
2. Entity’s ability to pay dividends and obligations.
3. Reasons for the difference between net income and net
cash provided (used) by operating activities.
4. Cash investing and financing transactions during the
period.
CFS & Relationships with Financial Statements
Statement of cash flows
Business activities
Investment activities
Financial activities
Cash Debts  Hoạt động tài chính Cash Debts
Other
assets Equity
other Equity
assets
Undistributed
Undistributed profit
profit
Balance Sheet Balance
Income Statement sheet
Factors that make the
Inventory management policy
difference between
Manage Receivables / Payables
income statement and
statement of cash flows Investment plan; Capital mobilization policy
Statement of Cash flows
CFS
Information How does the cash of the business change in a

users
financial period?(How much does it come from,
where does it come from and what is it used for?)
Managers: Investors Lenders
Do businesses have The ability of business to generate money in Is the business

enough money to repay the future? Does it need to be further able to pay?
debts/pay dividends? funded? can dividends be paid?
2 CASH FLOW STATEMENT FORMAT
34
XYZ Company
Statement of cash flows
202X
Cash flow in I. Net cash flow from business activities $ XXX
3 types of II. Net cash flow from invesment activities XXX

activities III. Net cash flow from financial activities XXX
Net cash flow in the period $ XXX
Plus: Backlog of CF at the beginning of period XXX
Lap BC LCTT gian Backlog of CF at the end of period $ XXX

tiep
Classification of Cash Flows
Operating Investing Financing

Activities Activities Activities
Income Changes in Changes in

Statement Items Investments and Long-Term
Long-Term Liabilities and
Assets Stockholders’
Equity
CASH FLOW FROM OPERATING ACTIVITIES
36
Is cash flow Cash inflows

related to daily
business Collect from customers
activities and
generates the
main revenue
of the Cash outflows
business. • Salary and wages
• Pay for suppliers
• Tax payment
• Loan Interest
CASH FLOW FROM INVESTING ACTIVITIES
37
Cash inflows
Is cash flow
Sell fixed assets
related to
• Sell long-term investment stocks fixed asset
• Loan recovery (principal) trading and
• Received dividends long-term
• Loan interest
investment
activities.
Cash outflows
Buy fixed assets

• Buy long-term investment stocks
• Buying bonds, lending
CASH FLOW FROM FINANCING ACTIVITIES
38
Is cash Cash inflows

flow related
Issuance of stocks
to activities
• Issuance of bonds
that • Short-term and long-term loans
change the
size and
structure of
Cash outflows
the equity
and loans Dividend payment
of the • Buy treasury stocks
enterprise. • Repayment of loans
• owners withdraw capital
Significant Noncash Activities

1. Direct issuance of common stock to purchase assets.
2. Conversion of bonds into common stock.
3. Direct issuance of debt to purchase assets.
4. Exchanges of plant assets.
Companies report noncash activities in either a

 separate schedule (bottom of the statement) or
 separate note to the financial statements.
Net income and Net cash
provided by operating activities
In general, why do difference exist between net income

and net cash flow provided from operating activities?
Presentation of cash flow statement
2 Methods
Direct Indirect
(not use for current exam)
Net profit or loss is adjusted for

Disclose major classes of gross cash
the effects of transactions of a
receipts and gross cash payments non-cash nature, any deferrals or
accruals, items of income or
(Rarely used in practice as costly expense associated with
to prepare) investing or financing cash flows
Format of the Statement of Cash Flows
Example:
Classify each of these transactions by type of cash flow activity.
1. Issued 100,000 shares of $5 par value

Financing
common stock for $800,000 cash.
2. Borrowed $200,000, signing a 5-year note
Financing
bearing 8% interest.
3. Purchased two semi-trailer trucks for
Investing
$170,000 cash.
4. Paid employees $12,000 for salaries and
wages. Operating
5. Collected $20,000 cash for services
Operating
provided.
EFFECT OF PRODUCT LIFE CYCLE ON CASH FLOWS
plus
Finance
Cash flows
Business
minus
Investment
Introduction growth Saturation Recession

STAGES
Investor Insight
Operating with negative cash
Why do companies have negative net cash providef by operating activities

during the introductory phrase?
Preparing the Statement of Cash Flows
Three Sources of Information:

1. Comparative balance sheets
2. Current income statement
3. Additional information

Three Major Steps:

Three Major Steps:

Three Major Steps:
Indirect and Direct Methods

Companies favor the indirect
method for two reasons:
1. Easier and less costly to
prepare.
2. Focuses on differences
between net income and net
cash flow from operating
activities.
Indirect Method
Additional information for 2014:

1. Depreciation expense was comprised of $6,000 for building and $3,000 for equipment.
2. The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated
depreciation $1,000) for $4,000 cash.
3. Issued $110,000 of long-term bonds in direct exchange for land.
4. A building costing $120,000 was purchased for cash. Equipment costing $25,000 was also
purchased for cash.
5. Issued common stock for $20,000 cash.
6. The company declared and paid a $29,000 cash dividend.
LO 4
Preparation of the Statement of Cash Flows
Indirect Method
Step 1: Operating Activities

Determine net cash provided/used by operating activities by
converting net income from accrual basis to cash basis.
Common adjustments to Net Income (Loss):

 Add back noncash expenses (depreciation, amortization, or
depletion expense).
 Deduct gains and add losses.
 Changes in noncash current asset and current liability
accounts.
Question
Which is an example of a cash flow from an operating
activity?
a. Payment of cash to lenders for interest.
b. Receipt of cash from the sale of capital stock.
c. Payment of cash dividends to the company’s
stockholders.
d. None of the above.
Depreciation Expense
Although depreciation expense reduces net income, it does not
reduce cash. The company must add it back to net income.
Cash flows from operating activities:

Net income $ 145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 9,000
Net cash provided by operating activities $ 154,000
Operating Activities
Loss on Disposal of Plant Assets

Companies report as a source of cash in the investing
activities section the actual amount of cash received from the
sale.
 Any loss on sale is added to net income in the operating
section.
 Any gain on sale is deducted from net income in the

operating section.
Loss on Disposal of Plant Assets

Loss on disposal of plant assets 3,000
Changes to Noncash Current Asset Accounts

When the Accounts Receivable balance decreases, cash
receipts are higher than revenue earned under the accrual basis.
Accounts Receivable
1/1/14 Balance 30,000 Receipts from customers 517,000
Sales revenue 507,000
12/31/14 Balance 20,000
Company adds to net income the amount of the decrease in

accounts receivable.

Decrease in accounts receivable 10,000

When the Inventory balance increases, the cost of merchandise
purchased exceeds the cost of goods sold.
Inventory
1/1/14 Balance 10,000 Cost of goods sold 150,000
Purchases 155,000
12/31/14 Balance 15,000
Cost of goods sold does not reflect cash payments made for
merchandise. The company deducts from net income this
inventory increase.

Increase in inventory (5,000)
When the Prepaid Expenses balance increases, cash paid for

expenses is higher than expenses reported on an accrual basis.
The company deducts the decrease from net income to arrive at
net cash provided by operating activities.
If prepaid expenses decrease, reported expenses are higher

than the expenses paid.

Increase in prepaid expenses (4,000)
Changes to Noncash Current Liability Accounts

When Accounts Payable increases, the company received more
in goods than it actually paid for. The increase is added to net
income to determine net cash provided by operating activities.
When Income Taxes Payable decreases, the income tax

expense reported on the income statement was less than the
amount of taxes paid during the period. The decrease is
subtracted from net income to determine net cash provided by
operating activities.
Changes to Noncash Current Liability Accounts

Increase in accounts payable 16,000
Decrease in income taxes payable (2,000)
Summary of Conversion to
Net Cash Provided by
Indirect Method
Step 2: Investing and Financing Activities
Company purchased land of $110,000 by exchanging bonds for

land. This is a significant noncash investing and financing activity
that merits disclosure in a separate schedule.
Land
1/1/14 Balance 20,000
Issued bonds 110,000
12/31/14 Balance 130,000
Bonds Payable
1/1/14 Balance 20,000
For land 110,000
12/31/14 Balance 130,000
Investing and Financing Activities
Partial statement
Net cash provided by operating activities 172,000
Cash flows from investing activities:
Purchase of building (120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000
Net cash used by investing activities (141,000)
Cash flows from financing activities:
Issuance of common stock 20,000
Payment of cash dividends (29,000)
Net cash used by financing activities (9,000)
Net increase in cash 22,000
Cash at beginning of period 33,000
Cash at end of period $ 55,000
Disclosure: Issuance of bonds to purchase land $ 110,000

From the additional information, the company acquired an

office building for $120,000 cash. This is a cash outflow
reported in the investing section.
Building
1/1/14 Balance 40,000
Office building 120,000
12/31/14 Balance 160,000

Partial statement

The additional information explains that the equipment increase
resulted from two transactions: (1) a purchase of equipment of
$25,000, and (2) the sale for $4,000 of equipment costing $8,000.
Equipment
1/1/14 Balance 10,000 Cost of equipment sold 8,000

Purchase 25,000
12/31/14 Balance 27,000
Cash 4,000
Journal
Accumulated Depreciation 1,000
Entry
Loss on Disposal of Plant Assets 3,000
Equipment 8,000
Statement Net income
$ 145,000
of Cash provided by operating activities:

Flows Loss on disposal of plant assets
Decrease in accounts receivable
3,000
10,000
Indirect Decrease in income taxes payable (2,000)
Method Cash flows from investing activities:
The increase in common stock resulted from the issuance of
new shares.
Common Stock
1/1/14 Balance 50,000

Shares sold 20,000
12/31/14 Balance 70,000

Partial statement

Retained earnings increased $116,000 during the year. This
increase can be explained by two factors: (1) Net income of
$145,000 increased retained earnings, and (2) Dividends of
$29,000 decreased retained earnings.
Retained Earnings
1/1/14 Balance 48,000

Dividends 29,000 Net income 145,000
12/31/14 Balance 164,000

Statement Net income
$ 145,000
of Cash provided by operating activities:

Flows Loss on disposal of plant assets
Decrease in accounts receivable
3,000
10,000
Indirect Decrease in income taxes payable (2,000)
Method Cash flows from investing activities:
Step 3: Net Change in Cash
Compare the net change in cash on the Statement of Cash
Flows with the change in the cash account reported on the
Balance Sheet to make sure the amounts agree.
Review Question
Which is an example of a cash flow from an investing
activity?
a. Receipt of cash from the issuance of bonds payable.
b. Payment of cash to repurchase outstanding capital
stock.
c. Receipt of cash from the sale of equipment.
d. Payment of cash to suppliers for inventory.
Using Cash Flows to Evaluate a Company
Free Cash Flow
Free cash flow describes the cash remaining from

operations after adjustment for capital expenditures and
dividends.
Required:
Calculate
Microsoft’s
free cash flow.
Net cash provided by operating activities $37,529

Less: Expenditures on PP&E and intangibles 7,452
Dividends paid 0
Free cash flow $30,077
Assessing Liquidity and Solvency

Liquidity is the ability to pay obligations expected to become
due within the next year.
A value below .40 times is cause for additional investigation.

Assessing Liquidity and Solvency

Solvency is the ability of a company to survive over the long
term.
A ratio below .20 times is cause for additional investigation.

Format of Cash Flow Statement
Direct method
$ $
Cash flows from operating activities
Cash receipts from customers xxxxxxx
Cash paid to supplier and employees xxxxxxx
Cash generated from operations xxxxxxx
Interest paid xxxxxxx
Income taxes paid xxxxxxx
Net cash from operating activities xxxxxxx
Cash flows from investing activities

Purchase of property, plant and equipment xxxxxxx
Proceeds from sale of equipment xxxxxxx
Interest received xxxxxxx
Dividend received xxxxxxx
Net cash used in investing activities xxxxxxx
Cash flows from financing activities
Proceeds from issuance of share capital xxxxxxx
Proceeds from long-term borrowings xxxxxxx
Dividends paid * xxxxxxx
Net cash used in investing activities xxxxxxx
Cash flows from financing activities xxxxxxx
Cash receipts from shares issued xxxxxxx
Long term loan paid xxxxxxx
Net cash from financing activities
Net increase in cash and cash equivalent xxxxxxx
Cash and cash equivalent at beginning of period xxxxxxx
Cash and cash equivalent at end of period xxxxxxx
Direct
Cash Flow Statement
method
1. Compute net cash provided by operating activities by

adjusting each item in the income statement from the
accrual basis to the cash basis.
2. Companies report only major classes of operating cash

receipts and cash payments.
3. For these major classes, the difference between cash

receipts and cash payments is the net cash provided by
operating activities.
Net profit & net cash flow from business activities
86
Eliminate non-cash revenue

Revenue
Profit Net cash flow from

business activities
Expense
Eliminate non-cash expense
ADVANTAGES OF DIRECT METHOD
87
Consistent with the objectives of the statement of cash

flows
 Specify the sources of cash creation and the
purposes of spending the cash.
Cash Flow Statement Direct
Method
CHAPTER 3
PLANNING AND BUDGETING
CHAPTER 3
89
CHAPTER 3
Cash inflows
Cash outflows
Planning and budgeting: long-term and short-term
Cash flow forecast
90
OBJECTIVES
Determine when the business's cash flow appears

Determine cash flow in, cash out flow based on
business short-term operation plan.
Planning process
Contents of planning process and budgeting
How to handle the budget in case of surplus or deficit
91
CASH FLOW STATEMENT
Basic principles for prepare CF

Opening balance – Cash & Cash
equivalent
Operating CF
Cash Flows in the period
Investing CF
(Movement)
Financing CF
Ending balance – Cash &

Cash equivalent
Cash and cash equivalents
Cash Not held for investment or other long-term purposes,
equivalent but rather to meet short-term cash commitments
Example: Term deposit (2 months)
An investment’s (loan, borrowing, bank overdraft…)

maturity date should normally be three months from its
acquisition date (noted: equity investment like shares in
other companies  NOT cash equivalent)
Note for CF Movements between different types of cash and cash

presentation equivalent  not included in cash flows
i.e. Term deposits matured  transfer to bank accounts
Presentation of cash flow statement
2 Methods
Direct Indirect
Net profit or loss is

Disclose major classes of
adjusted for the effects of
gross cash receipts and
transactions of a non-cash
gross cash payments
nature, any deferrals or
accruals, items of income or
(Rarely used in practice as
expense associated with
costly to prepare)
investing or financing cash
flows
Advantages and criticism of cash flow
Advantages Criticism of preparing cash flow
• Survival in business depends on the ability to generate cash.
Cash flow accounting directs attention towards this critical
issue • Cash equivalent  not easy to
• Cash flow is more comprehensive than “profit” which is distinguish and unrealistic (like an
dependent on accounting conventions and concepts
investment has to be within three
• Creditors (long and short-term) are more interested in an
enterprise’s ability to repay them than in its profitability months of maturity)
• Cash flows reporting provides better mean of comparing the • No interpretation of the CFS is
result of different companies rather than traditional profit
reporting
provided within the accounts
• Management: information for decision making (relevant cost, • Non-cash transactions (bonus issue)
future cash…) are not highlighted, they are of
• Shareholder/auditor: provide satisfactory basis for stewardship
accounting interest to users as they will impact
• Cash flow forecasts are easier to prepare and more useful than future cash flows
profit forecasts
• Accruals concept is confusing and cash flows are more easily
understood
• Forecast can subsequently be monitored by compare actual
cash flow against the forecast.
Questions
Exercise 1
A company made a loss on the disposal of a company motor vehicle of $8,000. The vehicle
originally cost $50,000 and at the date of disposal, accumulated depreciation on the vehicle
was $20,000.
Required:
What are the items that should be included for the disposal of the vehicle in the statement of
cash flows for the year:
(a) in the adjustments to get from operating profit to cash flow from operations?
(b) under the heading: ‘Cash flows from investing activities’?
Questions
Exercise 2
A company made an operating profit before tax of $16,000 in the year just ended.
Depreciation charges were $15,000. There was a gain of $5,000 on disposals of non-current
assets and there were no interest charges. Values of working capital items at the beginning
and end of the year were:
Receivables Inventory Trade payables
Beginning of the year $9,000 $3,000 $4,000
End of the year $6,000 $5,000 $6,500
Taxation paid was $4,800.
Required: Calculate the amount of cash generated from operations, as it would be shown in
a statement of cash flows using the indirect method.
Questions
Exercise 3
A company had liabilities in its statement of financial position at the beginning and at the end of Year 1,
as follows:
Liability for interest charges Liability for taxation
Beginning of Year 1 $4,000 $53,000
End of Year 1 $3,000 $61,000
During the year, interest charges in the income statement were $22,000 and taxation on profits were
$77,000.
Required: Calculate the amounts of interest payments and tax payments (cash flows) for inclusion in the
statement of cash flows
Questions
Exercise 4
During the year a vehicle was disposed of for a gain of $3,000. The original cost of this asset
was $60,000.
Required: Calculate the cash paid for PPE acquired.
Questions
Exercise 5
The statements of financial position of Grand Company at the beginning and end of Year 1
include the following information:
Property, plant and equipment Beginning of Year 1 End of Year 1
cost/re‐valued amount 1,400,000 1,900,000
Accumulated depreciation 350,000 375,000
Carrying value 1,050,000 1,525,000
During the year, some property was re-valued upwards by $200,000. An item of equipment
was disposed of during the year at a profit of $25,000. This equipment had an original cost of
$260,000 and accumulated depreciation of $240,000 at the date of disposal.
Required: Calculate the amount of cash paid for PPE acquired

Questions
Exercise 6
The statements of financial position of Entity PLM at 1 January and 31 December included
the following items:
1 January Year 1 31 December Year 1
$ $
Equity shares of $1 each 600,000 750,000
Share premium 800,000 1,100,000
Required: Calculate the cash generated from issuing new shares.

Questions
Exercise 7
The statements of financial position of Entity PLM at 1 January and 31 December included
the following items:
1 January Year 1 31 December Year 1
$ $
Loans repayable within 12 months 760,000 400,000
Loans repayable after 12 months 1,400,000 1,650,000
Required: Calculate the net CF relating to loans during the year.

Questions
Exercise 8
From the following information, calculate the cash flows from investing activities for Penron
Company in Year 1.
Beginning of Year 1 End of Year 1
$ $
Share capital (ordinary shares) 400,000 500,000
Share premium 275,000 615,000
Retained earnings 390,000 570,000
1,065,000 1,685,000
Loans repayable after more than 12 months 600,000 520,000
Loans repayable within 12 months or less 80,000 55,000
The company made a profit of $420,000 for the year after taxation.
Required: Calculate for year 1, for inclusion in the statement of cash flows:
(a) the cash from issuing new shares
(b) the cash flows received or paid for loans
(c) the payment of dividend to ordinary shareholders.
Question 1
• An extract from a statement of cash flows prepared by a trainee
accountant is shown below.
• Cash flows from operating activities
$m
Net profit before taxation 28
Adjustments for Depreciation (9)
Operating profit before working capital changes 19
Decrease in inventories 13
Increase in receivables (4)
Increase in payables (8)
Cash generated from operations 10
• Which TWO of the following criticisms of this extract are correct?

A. Depreciation charges should have been added, not deducted
B. Decrease in inventories should have been deducted, not added.
C. Increase in receivables should have been added, not deducted.
D. Increase in payables should have been added, not deducted
Question 2
• Which of the following items could appear in a
company’s statement of cash flows?
A. Surplus on revaluation of non-current assets
B. Proceeds of issue of shares
C. Proposed dividend
D. Irrecoverable debts written off
E. Dividends received
Question 3
• Which of the following assertions about statement of cash flows is/are
correct?
A. A statement of cash flows prepared using the direct method produces a
different figure for operating cash flow from that produced if the indirect
method is used.
B. Rights issues of shares do not feature in statements of cash flows.
C. A surplus on revaluation of a non-current asset will not appear as an item
in a statement of cash flows.
D. A profit on the sale of a non-current asset will appear as an item under
Cash Flows from Investing Activities in a statement of cash flows.
Question 4
• The following extract is from the financial statements of Pompeii, a limited
liability company at 31 October:
20X9 20X8
$’000 $’000
Equity and liabilities

Share capital 120 80
Share premium 60 40
Retained earnings 85 68
265 188
Non-current liabilities
Bank loan 100 150
365 338
• What is the cash inflow from financing activities to be disclosed in the
statement of cash flows for the year ended31 October 20X9?
Question 5
• Part of a company’s draft statement of cash flows is shown below:
$’000
Net profit before tax 8,640
Depreciation charges (2,160)
Proceeds of sale of non-current assets 360
Increase in inventory (330)
Increase in accounts payable 440
• Which TWO of the following criticisms of the above extract are valid?
A. Depreciation charges should have been added, not deducted.
B. Increase in inventory should have been added, not deducted.
C. Increase in accounts payable should have been deducted, not added.
D. Proceeds of sale of non-current assets should not appear in this part of
the statement of cash flows.
Question 6
• Which TWO of the following items could appear ¡n
a company’s statement of cash flows?
A. Proposed dividends
B. Rights issue of shares
C. Bonus issue of shares
D. Repayment of loan
Question 7
• In the course of preparing a company’s statement of cash flows, the
following figures are to be included in the calculation of net cash from
operating activities. $
Depreciation charges 980,000
Profit on sale of non-current assets 40,000
Increase in inventories 130,000
Decrease in receivables 100,000
Increase in payables 80,000
• What will the net effect of these items be in the statement of cash
flows?
$
A Addition to operating profit 890,000
B Subtraction from operating profit 890,000
C Addition to operating profit 1,070,000
D Addition to operating profit 990,000
PLANNING PROCESS
Short-term planning
Preparation
Cash
Forecast
Cash
planning
Cash
budgeting
Planning cash flow for the purpose of short-term

operations.
111
PLANNING PROCESS
Short-term planning
Step 1: Prepare the cash flow planning

To make an effective cash flow plan, businesses need to collect
information about past cash flows. Cash flow history needs to be
collected at least in the last 12 months. On that basis, perform a
classification of cash inflows and outflows and make decisions
about planned cash flows.
Step 2: Cash flow forecasting

Planning helps businesses find the most relevant results, while also
pointing out data for each specific activity of the business. Plan to
make decisions for forecasting, test options, fix times, from which
results the company will run business.
112
PLANNING PROCESS
Short-term planning
Step 3: Cash flow planning
Attempt to smooth out cash flow. Cash flow typically

fluctuates significantly from period to period. Receipts can
perhaps be accelerated, or selected disbursements deferred in
order to smooth out shortfalls and avoid borrowing money or
delaying payments to important vendors or suppliers.
Make investments as early as possible. Idle cash is a lazy
asset, and the opportunity to put cash to work for the
company in an interest-bearing account will help to improve
overall return to the company.
113
PLANNING PROCESS
Short-term planning
Step 3: Cash flow planning
Delay borrowing as long as possible. The cash flow plan will

show prospective shortfalls for which borrowing may have to
be incurred.
Get early information. The advantage of having early
information so as to preclude the chaos of dealing with
unexpected cash excesses or shortfalls should be obvious to
any businessperson who has had to put out a fire or otherwise
deal with an emergency.
114
PLANNING PROCESS
Step 4
Step 4: Budgeting management/Cash management
Forecasting sales
Projecting cash receipts
Projecting cash disbursements
Projecting cash balances
115
State the essentials of effective budgeting and
STEP 1
the components of the master budget.
Budget: a formal written statement of management’s plans for

a specified future time period, expressed in financial terms.
 Primary method of communicating agreed-upon objectives
throughout the organization.
 Promotes efficiency.
 Control device - important basis for performance evaluation

once adopted.
The Benefits of Budgeting
Primary benefits of budgeting:

1. Requires all levels of management to plan ahead.
2. Provides definite objectives for evaluating performance.
3. Creates an early warning system for potential problems.
4. Facilitates coordination of activities within the business.
5. Results in greater management awareness of the entity’s

overall operations.
6. It motivates personnel throughout organization to meet

planned objectives.
Essentials of Effective Budgeting
 Depends on a sound organizational structure with

authority and responsibility for all phases of operations
clearly defined.
 Based on research and analysis with realistic goals.
 Accepted by all levels of management.
Essentials of Effective Budgeting
LENGTH OF THE BUDGET PERIOD

 May be prepared for any period of time.
► Most common - one year (~ 12 months).
► Supplement with monthly and quarterly budgets.
► Different budgets may cover different time periods.
 Long enough to provide an attainable goal and
minimize seasonal or cyclical fluctuations.
 Short enough for reliable estimates.
Prepare budgets for sales, production, and
STEP 2
direct materials.
Sales Budget
 First budget prepared.
 Derived from the sales forecast.
► Management’s best estimate of sales revenue for
the budget period.
 Every other budget depends on the sales budget.
 Prepared by multiplying expected unit sales volume for
each product times anticipated unit selling price.
Sales Budget
CASE STUDY: Hayes Company

 Expected sales volume: 3,000 units in the first quarter with
500-unit increases in each succeeding quarter.
 Sales price: $60 per unit.
Production Budget
 Shows units that must be produced to meet anticipated

sales.
 Derived from sales budget plus the desired change in
ending finished goods inventory.
 Essential to have a realistic estimate of ending inventory.
Production Budget
Hayes Co. believes it can meet future sales needs with an ending
inventory of 20% of next quarter’s budgeted sales volume.
Direct Materials Budget
 Shows both the quantity and cost of direct materials to be

purchased.
 Formula for direct materials quantities.
Illustration 9-6
 Budgeted cost of direct materials to be purchased = required

units of direct materials x anticipated cost per unit.
 Inadequate inventories could result in temporary shutdowns
of production.
Because of its close proximity to suppliers,

 Hayes Company maintains an ending inventory of raw
materials equal to 10% of the next quarter’s production
requirements.
 The manufacture of each Rightride requires 2 pounds of
raw materials, and the expected cost per pound is $4.
 Assume that the desired ending direct materials amount is
1,020 pounds for the fourth quarter of 2017.
 Prepare a Direct Materials Budget.
Example 2 Sales, Production, and Direct Materials Budget
Soriano Company is preparing its master budget for 2017. Relevant data
pertaining to its sales, production, and direct materials budgets are as follows:
Sales: Sales for the year are expected to total 1,200,000 units. Quarterly sales
are 20%, 25%, 30%, and 25% respectively. The sales price is expected to be
$50 per unit for the first three quarters and $55 per unit beginning in the fourth
quarter. Sales in the first quarter of 2018 are expected to be 10% higher than
the budgeted sales for the first quarter of 2017.
Production: Management desires to maintain ending finished goods
inventories at 25% of next quarter’s budgeted sales volume.
Direct materials: Each unit requires 3 pounds of raw materials at a cost of $5
per pound. Management desires to maintain raw materials inventories at 5% of
the next quarter’s production requirements. Assume the production
requirements for the first quarter of 2018 are 810,000 pounds.
Prepare the sales, production, and direct materials budgets by

quarters for 2017.

quarters for 2017.

quarters for 2017.
Prepare the sales, production, and direct materials budgets.

CASH PLANNING
Direct method: Cash Receipts and Disbursements
Cash receipts
Cash sales
Accounts receivable collections
Sales of assets
Interest and dividends received
Proceeds from borrowing
Proceeds from new equity
Other cash receipts
132
CASH PLANNING
Cash disbursements
Cash sales Dividend payments
Accounts payable Debt amortization
Payroll costs (net) Capital expenditures
Payroll taxes Rents, royalties, etc.
Fringe benefits payments Income taxes
Manufacturing/service Property taxes
expenses Insurance premiums
Marketing/administrative Other cash disbursements
expenses
Interest expense
133
CASH PLANNING
Bài tập: Doanh nghiệp A có doanh thu lịch sử 3 tháng cuối năm N-1 và
doanh thu dự kiến 6 tháng đầu năm N như sau:
Đơn vị: triệu USD
THỰC TẾ DỰ KIẾN
Tháng 10/N-1 11/N-1 12/N-1 1/N 2/N 3/N 4/N 5/N 6/N
Doanh thu 196 207 203 200 250 400 500 300 200
Cho biết:
1. 5% doanh thu được trả ngay lập tức, 10% doanh thu được trả sau đó
nhưng vẫn trong tháng phát sinh, 60% doanh thu được trả sau 1 tháng, 15%
doanh thu được trả sau 2 tháng, 10% doanh thu được trả sau 3 tháng.
2. Tiền thu khác từ hoạt động kinh doanh như sau:
Tháng 10/N-1 11/N-1 12/N-1 1/N 2/N 3/N 4/N 5/N 6/N
Thu khác từ kinh doanh Thực Thực Thực 11 2 4 8 10 5
3. Dự kiến dòng tiền cho các chi phí và mua sắm tài sản như sau:
- Chi phí nguyên vật liệu trực tiếp bằng 24% doanh thu.
- Chi phí nhân công trực tiếp bằng 6% doanh thu 134
CASH PLANNING
- Chi phí sản xuất chung là 25
- Thuế và các khoản liên quan: 1% doanh thu
- Chi phí sản xuất khác dự kiến như sau:
Tháng 10/N-1 11/N-1 12/N-1 1/N 2/N 3/N 4/N 5/N 6/N
Chi phí sản xuất khác Thực Thực Thực 33 47 91 120 61 33
- Chi phí hoa hồng bằng 5% doanh thu
- Chi phí bán hàng và quản lý doanh nghiệp bằng 25% doanh thu
- Doanh nghiệp dự kiến có khoản chi mua sắm công cụ dụng cụ vào tháng 3 và tháng
6 lần lượt là 20 và 30.
- Lãi vay trả hàng tháng: 10
- Chi phí khác mỗi tháng: 5
Yêu cầu
1. Lập bảng tính tổng thu, tổng chi và chênh lệch thu chi mỗi tháng
2. Cho biết tiền và các khoản tương đương tiền ngày 1/1/N là 100, tính tiền mặt cuối
mỗi tháng nếu không có hoạt động tài trợ cho thâm hụt ngân quỹ
3. Cho biết số dư tiền mặt tối thiểu yêu cầu là 100, xác định số tiền cần vay hàng
tháng để tài trợ cho thâm hụt ngân quỹ và số dư ngân quỹ cuối mỗi tháng khi có hoạt
động tài trợ đó. 135
CASH PLANNING
Direct method: Cash Receipts
Cash Flow Planning
ACTUAL (Act.) PROJECTED
OCT NOV DEC JAN FEB MAR APR MAY JUN
Sales (actual for first three months; then forecasted
196 207 203 200 250 400 500 300 200
Collections:
Cash sales—5% Act. Act. Act. 10 12 20 25 15 10
Current month -10% Act. Act. Act. 20 25 40 50 30 20
Prior month -60% Act. Act. Act. 122 120 150 240 300 180
Second prior -15% Act. Act. Act. 31 30 30 37 60 75
Third prior -10% Act. Act. Act. 20 21 20 20 25 40
Total Cash Inflow from Collections
Act. Act. Act. 203 208 260 372 430 325
Other cash receipts Act. Act. Act. 11 2 4 8 10 5
Total Inflow-Month Act. Act. Act. 214 210 264 380 440 330
Total Inflow-Cum. 214 424 688 1,068 1,508 1,838
136
CASH PLANNING
Direct method: Disbursements
ACTUAL (Act.) PROJECTED

Sales (actual for first three months; then forecasted)
196 207 203 200 250 400 500 300 200
Cash Expenditures (Some expenses are calculated as the percentage of Revenue (Rev.)
Material purchases Act. Act. Act. 48 60 96 120 72 48
Payroll direct labour cost Act. Act. Act. 12 15 24 30 18 12
Payroll general expenses Act. Act. Act. 25 25 25 25 25 25
Payroll taxes and fringe benefits Act. Act. Act. 2 2.5 4 5 3 2
Other manufacturing expenses Act. Act. Act. 33 47 91 120 61 33
Commissions Act. Act. Act. 10 12 20 25 15 10
Other SG&A expenses Act. Act. Act. 50 63 100 125 75 50
Capital equipment Act. Act. Act. 0 0 20 0 0 30
Debt service Act. Act. Act. 10 10 10 10 10 10
Other expenditures Act. Act. Act. 5 5 5 5 5 5
Total Cash Payments - Month Act. Act. Act. 195 239.5 395 465 284 225
Total Cash Payments -Cum. 195 434.5 829.5 1294.5 1578.5 1803.5
137
CASH PLANNING
Direct method: Disbursements
ACTUAL PROJECTED
Sales (actual for first three months; then forecasted)
196 207 203 200 250 400 500 300 200
Beginning Cash without borrowing
Act. Act. Act. 100 119 94 (37) (122) 33
NET CASH FLOW -MONTH
Act. Act. Act. 19 (25) (131) (85) 155 105
Ending Cash without Borrowing
Act. Act. Act. 119 94 (37) (122) 33 138
Borrowing required
Act. Act. Act. 0 6 137 222 67 0
ENDING CASH BALANCE
Act. Act. Act. $119 $100 $100 $100 $100 $138
138
Prepare budgets for direct labor, manufacturing
STEP 3 overhead, and selling and administrative expenses,
and a budgeted income statement.
Direct Labor Budget

 Shows both the quantity of hours and cost of direct labor
necessary to meet production requirements.
 Critical in maintaining a labor force that can meet
expected production.
 Total direct labor cost formula:
Direct Labor Budget
Case study: Direct labor hours are determined from the

production budget. At Hayes Company, two hours of direct
labor are required to produce each unit of finished goods. The
anticipated hourly wage rate is $10.
Manufacturing Overhead Budget
 Shows the expected manufacturing overhead costs for

the budget period.
 Distinguishes between fixed and variable overhead
costs.
Manufacturing Overhead Budget
Case study: Hayes Company expects variable costs to

fluctuate with production volume on the basis of the following
rates per direct labor hour: indirect materials $1.00, indirect
labor $1.40, utilities $0.40, and maintenance $0.20. Thus, for
the 6,200 direct labor hours to produce 3,100 units, budgeted
indirect materials are $6,200 (6,200 x $1), and budgeted
indirect labor is $8,680 (6,200 x $1.40). Hayes also recognizes
that some maintenance is fixed. The amounts reported for fixed
costs are assumed.
Prepare a Manufacturing Overhead Budget.
Selling and Administrative Expense
Budget
 Projection of anticipated operating expenses.

 Distinguishes between fixed and variable costs.
Case study: Variable expense rates per unit of sales are sales
commissions $3 and freight-out $1. Variable expenses per
quarter are based on the unit sales from the sales budget. Hayes
expects sales in the first quarter to be 3,000 units. Fixed
expenses are based on assumed data.
Prepare a selling and administrative expense budget.
Budgeted Income Statement
 Important end-product of the operating budgets.

 Indicates expected profitability of operations.
 Provides a basis for evaluating company performance.
 Prepared from the operating budgets:
► Sales ► Manufacturing Overhead

► Direct Materials ► Selling and Administrative Expense
► Direct Labor
Case study: To find the cost of goods sold, it is first

necessary to determine the total unit cost of producing one
Rightride, as follows.
Second, determine Cost of Goods Sold by multiplying units

sold times unit cost: 15,000 units x $44 = $660,000
Case study: All data for the income statement come from the
individual operating budgets except the following: (1) interest
expense is expected to be $100, and (2) income taxes are
estimated to be $12,000.
Question
Each of the following budgets is used in preparing the budgeted
income statement except the:
a. Sales budget.
b. Selling and administrative budget.
c. Capital expenditure budget.
d. Direct labor budget.
Example 3 Budgeted Income Statement
Soriano Company is preparing its budgeted income statement

for 2017. Relevant data pertaining to its sales, production, and
direct materials budgets can be found on the following slide.
Soriano budgets 0.5 hours of direct labor per unit, labor costs at
$15 per hour, and manufacturing overhead at $25 per direct
labor hour. Its budgeted selling and administrative expenses for
2017are $12,000,000.
(a) Calculate the budgeted total unit cost.

(b) Prepare the budgeted income statement for 2017.
Soriano Company is preparing its master budget for 2017. Relevant data
pertaining to its sales, production, and direct materials budgets are as
follows:
Sales: Sales for the year are expected to total 1,200,000 units. Quarterly
sales are 20%, 25%, 30%, and 25% respectively. The sales price is
expected to be $50 per unit for the first three quarters and $55 per unit
beginning in the fourth quarter. Sales in the first quarter of 2018 are
expected to be 10% higher than the budgeted sales for the first quarter of
2017.
Production: Management desires to maintain ending finished goods
inventories at 25% of next quarter’s budgeted sales volume.
Direct materials: Each unit requires 3 pounds of raw materials at a cost
of $5 per pound. Management desires to maintain raw materials
inventories at 5% of the next quarter’s production requirements. Assume
the production requirements for the first quarter of 2018 are 810,000
pounds.
Calculate the budgeted total unit cost and prepare the budgeted
income statement for 2017.
(a)
Calculate the budgeted total unit cost and prepare the budgeted
income statement for 2017.
(b)
(b)
STEP 4 Prepare a cash budget and a budgeted balance sheet.
Cash Budget
 Shows anticipated cash flows.
 Often considered to be the most important output in
preparing financial budgets.
 Contains three sections:
► Cash Receipts
► Cash Disbursements
► Financing
 Shows beginning and ending cash balances.
Cash Budget
Cash Budget
 Cash Receipts Section

► Expected receipts from the principal sources of revenue.
► Expected interest and dividends receipts, proceeds from
planned sales of investments, plant assets, and the
company’s capital stock.
 Cash Disbursements Section
► Expected cash payments for direct materials, direct labor,
manufacturing overhead, and selling and administrative
expenses.
 Financing Section
► Expected borrowings and repayments of borrowed funds
plus interest.
Cash Budget
 Must prepare in sequence.

 Ending cash balance of one period is the beginning cash
balance for the next.
 Data obtained from other budgets and from management.
 Often prepared for the year on a monthly basis.
 Contributes to more effective cash management.
 Shows managers the need for additional financing before
actual need arises.
 Indicates when excess cash will be available.
Cash Budget
Case study: Hayes Company Assumptions

1. The January 1, 2017, cash balance is expected to be $38,000.
Hayes wishes to maintain a balance of at least $15,000.
2. Sales : 60% are collected in the quarter sold and 40% are
collected in the following quarter. Accounts receivable of
$60,000 at December 31, 2016, are expected to be collected in
full in the first quarter of 2017.
3. Short-term investments are expected to be sold for $2,000
cash in the first quarter.
Cash Budget

4. Direct materials : 50% are paid in the quarter purchased and
50% are paid in the following quarter. Accounts payable of
$10,600 at December 31, 2016, are expected to be paid in full in
the first quarter of 2017.
5. Direct labor: 100% is paid in the quarter incurred.
6. Manufacturing overhead and selling and administrative
expenses: All items except depreciation are paid in the quarter
incurred.
Cash Budget

7. Management plans to purchase a truck in the second quarter
for $10,000 cash.
8. Hayes makes equal quarterly payments of its estimated annual
income taxes.
9. Loans are repaid in the earliest quarter in which there is
sufficient cash (that is, when the cash on hand exceeds the
$15,000 minimum required balance).
Prepare a schedule of collections from customers.

Cash Budget
Case study: Prepare a schedule of collections from customers.

Cash Budget
Case study: Prepare a schedule of cash payments for direct materials.

Budgeted Balance Sheet
 Developed from the budgeted balance sheet for the

preceding year and the budgets for the current year.
Case study: Pertinent data from the budgeted balance

sheet at December 31, 2016, are as follows.
Buildings and equipment $182,000
Common stock 225,000
Accumulated depreciation 28,800
Retained earnings 46,480
Case study: Pertinent data from the budgeted balance sheet at

December 31, 2016, are as follows.
Buildings and equipment $182,000

Common stock 225,000
Accumulated depreciation 28,800
Retained earnings 46,480
1. Cash: Ending cash balance $37,900, shown in the cash budget

2. Accounts receivable: 40% of fourth-quarter sales $270,000,
shown in the schedule of expected collections from customers
3. Finished goods inventory: Desired ending inventory 1,000

units, shown in the production budget times the total unit cost
$44.
4. Raw materials inventory: Desired ending inventory 1,020

pounds, times the cost per pound $4, shown in the direct
materials budget.
5. Buildings and equipment: December 31, 2016, balance

$182,000, plus purchase of truck for $10,000.
6. Accumulated depreciation: December 31, 2016, balance

$28,800, plus $15,200 depreciation shown in manufacturing
overhead budget and $4,000 depreciation shown in selling and
administrative expense budget.
7. Accounts payable: 50% of fourth-quarter purchases $37,200,
shown in schedule of expected payments for direct materials.
8. Common stock: Unchanged from the beginning of the year.
9. Retained earnings: December 31, 2016, balance $46,480, plus
net income $47,900, shown in budgeted income statement.
Question
Expected direct materials purchases in Read Company are
$70,000 in the first quarter and $90,000 in the second quarter.
Forty percent of the purchases are paid in cash as incurred,
and the balance is paid in the following quarter. The budgeted
cash payments for purchases in the second quarter are:
a. $96,000 c. $78,000
b. $90,000 d. $72,000
Example 4 Cash Budget
Martian Company management wants to maintain a minimum

monthly cash balance of $15,000. At the beginning of March, the
cash balance is $16,500, expected cash receipts for March are
$210,000, and cash disbursements are expected to be $220,000.
How much cash, if any, must be borrowed to maintain the desired
minimum monthly balance?
Apply budgeting principles to nonmanufacturing
STEP 5
companies.
Merchandisers
 Sales Budget: starting point and key factor in developing the
master budget.
 Use a purchases budget instead of a production budget.
 Does not use the manufacturing budgets (direct materials,
direct labor, manufacturing overhead).
 To determine budgeted merchandise purchases:
Merchandisers
Example: Lima estimates that budgeted sales will be $300,000 in

July and $320,000 in August. Cost of goods sold is expected to be
70% of sales. The company’s desired ending inventory is 30% of
the followings month’s cost of goods sold. Required merchandise
purchases for July are computed as follows.
Service Companies
 Critical factor in budgeting is coordinating professional

staff needs with anticipated services.
 Problems if overstaffed:
► Disproportionately high labor costs.
► Lower profits due to additional salaries.
► Increased staff turnover due to lack of challenging work.
 Problems if understaffed:
► Lost revenues because existing and future client needs
for services cannot be met.
► Loss of professional staff due to excessive work loads.
Not-for-Profit Organizations
 Just as important as for profit-oriented company.

 Budget process differs from profit-oriented company.
 Budget on the basis of cash flows (expenditures and
receipts), not on a revenue and expense basis.
 Starting point is usually expenditures, not receipts.
 Management’s task is to find receipts needed to support
planned expenditures.
 Budget must be followed, overspending often illegal.
Merchandisers
Question
The budget for a merchandiser differs from a budget for a
manufacturer because:
a. A merchandise purchases budget replaces the

production budget.
b. The manufacturing budgets are not applicable.
c. None of the above.
d. Both (a) and (b) above
Example 5 Merchandise Purchases Budget
Becker Company estimates that 2017 sales will be $15,000 in quarter 1,

$20,000 in quarter 2, and $25,000 in quarter 3. Cost of goods sold is 80%
of sales. Management desires to have ending finished goods inventory
equal to 15% of the next quarter’s expected cost of goods sold. Prepare a
merchandise purchases budget by quarter for the first six months of 2017.
ORGANIZATION PLANNING PROCESS
177
CASE STUDY
123 company
123 company: Financial report and other information

(attached file)
Question:
Prepare cash flow statements using direct method
Determine the Company's budget
Handle the budget (surplus or deficit)
178
CONCLUSION OF CHAPTER 3
Cash flow planning, whether referred to as forecasting,

planning, budgeting, or projecting, is an indispensable part of
managing the company’s cash flow.
Planning process includes 4 steps:
Prepare the cash flow planning
Cash flow forecasting
Cash flow planning
Budgeting management/Cash management
Cash flow forecasts have many methods of setting, depending

on the operating conditions and characteristics of the business
179
CHAPTER 4
CASH FLOWS FORECASTING MODEL
CHAPTER 4
180
CHAPTER 4
Factors affecting cash flow forecasting
Cash flow forecasting methods
Case study
181
OBJECTIVE
Synthesize internal and external factors that affect the business's

cash flow forecast.
Determine the target of the cash flow forecast
Identify and select the basis of cash flow forecast
Understand the cash flow forecast method and apply these

methods in cash flow forecasting of the business.
182
CASH FLOWS FORECAST
Objective
To manage short-term money fluctuations and determine the
optimal cash balance to meet payments incurred.
The basis for the method and model of cash flow forecasting
Availability of data
Reliability of data
Forecast time
Sensitivity
183
CASH FLOWS FORECAST
Factors affecting cash flow forecast

External fators
Internal fators
184
CASH FLOW FORECAST PROCESS
1. Determine the structure of cash flows forecasted;

2. Select input data;
3. Input data collection;
4. Determine the relationship between input variables and forecast
cash flows;
5. Make predictions by applying relationships between the
dependent variables;
6. Evaluate the accuracy of the forecast.
185
CASH FLOWS FORECAST METHOD
Simple money fluctuation method (arithmetic addition)

Exponential prediction method
Methods of planning cash flows (balancing revenues and
expenditures)
Cash flow allocation method
The percetage of revenue method
Regression analysis method
186
CASH FLOWS FORECAST METHOD
CASE STUDY
187
ADDITION FUND NEEDED
(Nhu cầu tiền tăng thêm)
Capital needs Increase Increase

Addition
= for increased - liabilities - retained
fund needed
assets corresponding earnings
AFN = (A/So)x∆S - (L*/So)*∆S - PM(S1)RR

AFN
Trong đó:
A*_Assets increasing
So_ Previous year Sales
L*_Liabilities increasing (exluding loans)
L*/So_Liabilities increasing/ Sales
S1_ Sales forecast next year
PM_Profit margin (ROS)
RR_rate of retained earnings = 1- dividend payout rate

189
CHAPTER 5
CASH MANAGEMENT MODEL
CHAPTER 5
190
CHAPTER 5
Cash flows planning
Cash management model
Budget handling
Case study
191
OBJECTIVE
Make a cash plan based on addition fund needed
Reasons for Holding Cash
Understanding Float
Cash Collection and Concentration
Managing Cash Disbursements
Investing Idle Cash
192
MAKE OPTIMAL CASH BALANCE
Reasons for Holding Cash:
Speculative motive – hold cash to take advantage of unexpected

opportunities
Precautionary motive – hold cash in case of emergencies
Transaction motive – hold cash to pay the day-to-day bills
Trade-off between opportunity cost of holding cash relative to
the transaction cost of converting marketable securities to cash
for transactions
193
Understanding Float
Float – difference between cash balance recorded in the cash

account and the cash balance recorded at the bank
Disbursement float
Generated when a firm writes checks
Available balance at bank – book balance > 0
Collection float
Checks received increase book balance before the bank
credits the account.
Available balance at bank – book balance < 0
Net float = disbursement float + collection float
Example: Types of Float
You have $3,000 in your checking account. You just deposited

$2,000 and wrote a check for $2,500.
What is the disbursement float?

What is the collection float?
What is the net float?
What is your book balance?
What is your available balance?
Example: Measuring Float
Size of float depends on the dollar amount and the time delay.
Delay = mailing time + processing delay + availability delay
Suppose you mail a check each month for $1,000 and it takes
3 days to reach its destination, 1 day to process, and 1 day
before the bank makes the cash available.
What is the average daily float (assuming 30-day months)?

Method 1: (3+1+1)(1,000)/30 = 166.67
Method 2: (5/30)(1,000) + (25/30)(0) = 166.67
Example: Cost of Float
Cost of float – opportunity cost of not being able to use the
money
Suppose the average daily float is $3 million with a weighted
average delay of 5 days.
What is the total amount unavailable to earn interest?
5 × $3 million = $15 million
What is the NPV of a project that could reduce the delay by
3 days if the cost is $8 million?
Immediate cash inflow = 3 × $3 million = $9 million
NPV = $9 – $8 = $1 million
Cash Collection
Payment Payment Payment Cash

Mailed Received Deposited Available
Mailing Processing Delay Availability Delay

Time
Collection Delay
One of the goals of float management is to try to reduce the

collection delay. There are several techniques that can reduce
various parts of the delay.
Example: Accelerating Collections – Part I
Your company does business nationally, and currently all

checks are sent to the headquarters in Tampa, FL. You are
considering a lock-box system that will have checks processed
in Phoenix, St. Louis, and Philadelphia. The Tampa office will
continue to process the checks it receives in house.
Collection time will be reduced by 2 days on average.
Daily interest rate on T-bills = 0.01%.
Average number of daily payments to each lockbox is
5,000.
Average size of payment is $500.
The processing fee is $0.10 per check plus $10 to wire
funds to a centralized bank at the end of each day.
Example: Accelerating Collections – Part II
Benefits
Average daily collections = 3(5,000)(500) = 7,500,000
Increased bank balance = 2(7,500,000) = 15,000,000
Costs
Daily cost = 0.10(15,000) + 3 × 10 = 1,530
Present value of daily cost = 1,530 / 0.0001 = 15,300,000
NPV = 15,000,000 – 15,300,000 = -300,000

The company should not accept this lock-box
proposal.
Cash Disbursements
Slowing down payments can increase

disbursement float – but it may not be ethical or
optimal to do this.
Controlling disbursements
Zero-balance account
Controlled disbursement account
Investing Cash
Money market – financial instruments with an

original maturity of one year or less
Temporary Cash Surpluses
Seasonal or cyclical activities – buy marketable
securities with seasonal surpluses, convert securities
back to cash when deficits occur
Planned or possible expenditures – accumulate
marketable securities in anticipation of upcoming
expenses
Seasonal Cash Demands
Characteristics of Short-Term Securities
Maturity – firms often limit the maturity of short-term

investments to 90 days to avoid loss of principal due to
changing interest rates
Default risk – avoid investing in marketable securities with
significant default risk
Marketability – ease of converting to cash
Taxability – consider different tax characteristics when
making a decision
Quick Quiz
What are the major reasons for holding cash?

What is the difference between disbursement float
and collection float?
How does a lockbox system work?
What are the major characteristics of short-term
securities?
Boumol model
Miller – Orr model
Stone model
206
BAUMOL MODEL
Baumol model: The cash management model follows the

discrete method, applying the same principles as the inventory
management model (Economic ordering quantity_EOQ)
Assumptions :
Over a certain period of time, net cash flows appear at a constant rate,
the cash balance will be periodically added by selling short-term
securities at a fixed cost of transaction;
There is no collection in the planning period;
There are no cash reserves for safety purposes;
Additional cash management.
207
Costs of Holding Cash
Trading costs increase when the firm

Costs in dollars of must sell securities to meet cash needs.
holding cash
Total cost of holding cash
Opportunity
Costs
The investment income
foregone when holding cash.
Trading costs
C* Size of cash balance
The Baumol Model – I
F = The fixed cost of selling securities to raise cash

T = The total amount of new cash needed
R = The opportunity cost of holding cash, i.e., the interest rate
If we start with $C, spend at a

constant rate each period, and
replace our cash with $C when
C we run out of cash, our average
cash balance will be
C
–
–C2 2
The opportunity cost of holding
is C C
–2 –2 ×R
Time
1 2 3
The Baumol Model – II
As we transfer $C each period we
incur a trading cost of F.
C
If we need $T in total over the
planning period, we will pay $F
times. T
C –C
–2
The trading cost is –CT× F
1 2 3 Time
The Baumol Model – III
C T
Total cost   R   F
2 C
Opportunity C  R
Costs 2
T
Trading costs  F
C
C* Size of cash balance

* 2T
C  F
R
The Baumol Model – IV
The optimal cash balance is found where the opportunity costs equals
the trading costs.
Opportunity Costs = Trading Costs
C T
R  F
2 C
Multiply both sides by C.
C2 2TF 2 TF
R TF *
C  C  2
2 R R
MILLER – ORR MODEL
Miller - Orr model: A model of money management that

follows a continuous method and applies the same principles as
the inventory management model (EOQ).
Overcoming the limitation of discrete money management,

which does not fully reflect the fluctuation and intertwining of
cash flows.
213
MILLER – ORR MODEL
Assumptions:
The net cash flow of the business fluctuates completely randomly;
An enterprise holds two types of assets: corporate bonds and liquid assets,
such as liquidity securities with a yield of k;
Transaction costs are fixed. This transaction cost is the same for buying
and selling liquid securities;
Matured securities are automatically reinvested or not mentioned as part
of cash flow;
The budget will not fall below the lower limit of money reserves;
Based on the principles of inventory management, Miller - Orr
hypothesizes that the goal of the business is to minimize the cost of
holding money.
214
The Miller-Orr Model
• The firm allows its cash balance to wander randomly between
upper and lower control limits.
When the cash balance reaches the upper control limit U, cash is invested
$ elsewhere to get us to the target cash balance C.
U When the cash balance

reaches the lower control
limit, L, investments are
sold to raise cash to get us
up to the target cash
balance.
C
L
Time
The Miller-Orr Model: Math
• Given L, which is set by the firm, the Miller-Orr

model solves for C* and U
2
* 3 Fσ
C 3 L U *  3C *  2 L
4R
where s2 is the variance of net daily cash flows.
• The average cash balance in the Miller-Orr model is:
4C *  L
Average cash balance 
3
Implications of the
Miller-Orr Model
To use the Miller-Orr model, the manager must do four
things:
1. Set the lower control limit for the cash balance.
2. Estimate the standard deviation of daily cash flows.
3. Determine the interest rate.
4. Estimate the trading costs of buying and selling
securities.
Implications of the
Miller-Orr Model (ctd.)
• The model clarifies the issues of cash management:
– The optimal cash position, C*, is positively related

to trading costs, F, and negatively related to the
interest rate R.
– C* and the average cash balance are positively
related to the variability of cash flows.
Other Factors Influencing the Target Cash Balance
• Borrowing
• Borrowing is likely to be more expensive than
selling marketable securities.
• The need to borrow will depend on management’s
desire to hold low cash balances.
CASE STUDY
CASH FLOW MANAGEMENT OF 123 COMPANY
123 company (Chapter 2)

Requirement:
Determine cash inflow
Determine cash outflow
Planning cash flow
Make a cash flow management model
Make a cash management and budget management model
220
PRESENTATION
GROUP PRESENTATION
221
CONCLUSION
Focus on clarifying some fundamental theories about cash

management.
Cash management needs to build a corporate governance model
and determine the optimal level of cash balance. Some cash
management models such as Baumol model, Miller - Orr
model, Stone model.
Deficit and surplus budget needs to be done to reduce the cost
of the business’s cash balance. The model building and budget
handling help optimize the cash flow management of the
business.
Understand and implement cash management applications on
the software to increase the efficiency of cash flow
management of businesses.
222

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CASH FLOWS MANAGEMENT

Lecturer: Dr. Tran Tat Thanh

School: Banking and Finance

PROFIT OR CASH FLOWS ???

KEEP YOUR EYE ON THE CASH, NOT ON

1 Chapter 1: Introduction 4.5 3 1.5

Group assignment: 20%

Cash flows basic

Target and process of cash flows planning

Content of cash flows management

Financial ratios and cash flows analysis

Cash flow management is the process of tracking how

Control and track the cash flows

Business fail Bankuptcy

Cash Flow From Operations $

Income statement of 123 company:

Prior Current Next Year

The statement of cash flow of 123 company:

Performance evaluation and limited

 Business activities Cash

Estimate CASH INFLOWS

FORCAST cash flows

Cash flows and the statement of cash flows

Cash flow planning and forecasting

Model of money management and budget

Receivables from the sale of goods and services

Expenses for purchase of goods, raw materials in stock, tools,

The ability to meet payment through a group of

Expenses incurred when the enterprise cannot

Sources of Cash Uses of Cash

Profits from operations Losses from operations

Sale of equity Payment of dividends

Sale of assets Invetment/Acquistion of assets

Decrease in working capital Increase in working capital

SALES ARE GOOD.

The statement of cash flows (Cash flow statement_CFS)

Cash flows of business

Working capital and demand of working capital

Cash cycle and business cycle

MAXIMIZE CASH IN,

Assess the Assess debt Explain the

IAS07 and VAS24

Usefulness of the Statement of Cash Flows

Statement of cash flows

Information How does the cash of the business change in a

Managers: Investors Lenders

Do businesses have The ability of business to generate money in Is the business

Cash flow in I. Net cash flow from business activities $ XXX

3 types of II. Net cash flow from invesment activities XXX

Net cash flow in the period $ XXX

Plus: Backlog of CF at the beginning of period XXX

Lap BC LCTT gian Backlog of CF at the end of period $ XXX

Classification of Cash Flows

Operating Investing Financing

Income Changes in Changes in

Is cash flow Cash inflows

Buy fixed assets

Is cash Cash inflows

Significant Noncash Activities

Companies report noncash activities in either a

In general, why do difference exist between net income

Net profit or loss is adjusted for

1. Issued 100,000 shares of $5 par value