STAT E M E N T

OF C A S H
FLOWS
DEFINITION
• A CASH FLOW STATEMENT PRESENTS INFORMATION ABOUT
THE CASH FLOWS ASSOCIATED WITH THE COMPANY’S
MAIN OPERATIONS AND THOSE ASSOCIATED WITH ITS
INVESTING AND FINANCING ACTIVITIES OF THE PERIOD
• A CASH FLOW STATEMENT FUNCTIONS IN CONJUNCTION
WITH BOTH THE INCOME STATEMENT (PERFORMANCE
DIMENSION) AND THE BALANCE SHEET (FINANCIAL
POSITION)
• IAS 7 CASH FLOW STATEMENTS
USEFULNESS OF CASH FLOW INFORMATION

Ability to generate Cash flow information

Cash flow information
adequate cash flows is clarifies the dynamics
is an essential input
a significant of short-term liquidity
for economic decision
performance and long-term
models
dimension solvency
 CASH FLOW VERSUS PROFIT

• CASH FLOW AND PROFIT ARE DIFFERENT ECONOMIC PHENOMENA

• BUT LINKED THROUGH THE MECHANISMS OF ACCRUAL ACCOUNTING!
• CASH FLOWS ARE FACTUAL DETAILS OF INCOMING AND OUTGOING FLOWS OF CASH, WHILE THE BALANCE
SHEET AND INCOME STATEMENT EMANATE FROM PROFESSIONAL JUDGEMENT AND ARE NOT A DIRECT
PROJECTION OF OBJECTIVE ECONOMIC DATA
LIQUIDITY/SOLVENCY AND CASH
FLOWS
• LIQUIDITY
- RELATES TO “NEARNESS TO CASH” OF THE STRUCTURE OF ASSETS
- DETERMINED BY CAPACITY TO CONVERT CURRENT ASSETS INTO CASH

• SOLVENCY
- RELATES TO FUTURE AVAILABILITY OF CASH IN ORDER TO SETTLE FINANCIAL LIABILITIES
ON DUE DATE
- DETERMINED BY TIMING AND UNCERTAINTY OF EXPECTED FUTURE CASH PAYMENTS AND
CASH RECEIPTS

• LIQUIDITY AND SOLVENCY RATIOS ARE DETERMINED ON STATIC FINANCIAL POSITION DATA,
WHILE CASH FLOWS REFLECT CHANGES IN FINANCIAL POSITION
CASH CONVERSION CYCLES
• CASH FLOWS THROUGH THE COMPANY CONTINUOUSLY IN A
SERIES OF SHORT-TERM AND LONG-TERM CONVERSION
CYCLES

• THE ST - CASH CONVERSION CYCLE (OPERATING CYCLE)

RELATES TO THE MAIN BUSINESS OPERATIONS
• = OPERATING ACTIVITIES
CASH CONVERSION CYCLES
• THE LT- CASH CONVERSION CYCLES RELATE TO THE ACQUISITION,
RENEWAL AND DISPOSAL OF INTANGIBLE AND TANGIBLE
INFRASTRUCTURE AND THE LONG-TERM SOURCING OF FUNDS
• PRODUCTIVE CAPACITY ACQUIRED FOR CASH AND SUBSEQUENTLY
CONSUMED DURING SEVERAL ST-OPERATING CYCLES
• ACQUISITION AND DISPOSAL OF INFRASTRUCTURE = INVESTING
ACTIVITIES
• EXTERNAL SOURCING OF FUNDS = FINANCING ACTIVITIES
 Inventory

Procurement Work in Progress Sales

Current payables Inventory Current receivables

Cash and cash

Payments Receipts
equivalents

Investing/ Productive
External financing
infrastructure
 FORMAT AND
STRUCTURE OF
THE CASH FLOW
STATEMENT
 CASH FLOWS FROM OPERATING ACTIVITIES

• OPERATING ACTIVITIES ARE PRIMARILY THE REVENUE-GENERATING ACTIVITIES OF A

COMPANY

• “OPERATING CASH FLOW” IS CONCEPTUALLY MOST NEAR TO “NET PROFIT”

• MAIN DIFFERENCES:
1. NON-CASH EXPENSES AND NON-CASH REVENUES (F.I. DEPRECIATION EXPENSE)
2. NON-OPERATING ITEMS (F.I. GAIN ON DISPOSAL OF TANGIBLE FIXED ASSETS)
3. TIMING DIFFERENCES BETWEEN NET PROFIT AND UNDERLYING CASH FLOW (F.I.
CHANGES IN THE LEVEL OF INVENTORIES, RECEIVABLES, CREDITORS, ETC.)
 • RECEIPTS FROM SALE OF GOODS AND RENDERING OF SERVICES
(CASHING IN OF RECEIVABLES INCLUDED)
OPERATING • RECEIPTS FROM TAXES ON SALES AND VAT
CASH FLOWS: • RECEIPTS FROM ROYALTIES, FEES, COMMISSIONS,…
EXAMPLES • PAYMENTS TO SUPPLIERS (PAYMENT OF CREDITORS INCLUDED)
• PAYMENTS TO EMPLOYEES
• PAYMENTS OF TAXES, VAT, FINES, …
OPERATING CASH FLOWS –
DIRECT VERSUS INDIRECT METHOD
2 METHODS FOR IDENTIFYING AND PRESENTING THE OPERATING CASH FLOW:

• DIRECT METHOD: ENGENDERS THE PRESENTATION OF THE MOST

IMPORTANT CATEGORIES OF GROSS OPERATING CASH INFLOWS AND
CASH OUTFLOWS

• INDIRECT METHOD: NET OPERATING CASH FLOW IS DETERMINED BY

ADJUSTING THE (NET) PROFIT FIGURE FOR THE 3 TYPES OF DIFFERENCES
DIRECT METHOD - EXAMPLE
INDIRECT METHOD - EXAMPLE
CASH FLOWS FROM INVESTING
ACTIVITIES

• INVESTING ACTIVITIES RELATE TO THE ACQUISITION AND DISPOSAL OF LONG-TERM

TANGIBLE AND INTANGIBLE ASSETS AND OTHER INVESTMENTS

• CASH FLOWS FROM INVESTING ACTIVITIES ARE AN INDICATION OF THE EXPANSION

OR DOWNSIZING OF OPERATING CAPACITY

• EXAMPLES:
• PAYMENTS FOR NEWLY ACQUIRED EQUIPMENT
• RECEIPTS FROM THE DISPOSAL OF A BUILDING
• PAYMENTS FOR NEW INVESTMENTS
CASH FLOWS FROM FINANCING
ACTIVITIES
• FINANCING ACTIVITIES RELATE TO CHANGES IN THE SIZE AND COMPOSITION OF
CONTRIBUTED CAPITAL AND FINANCIAL DEBT OF THE COMPANY

• EXAMPLES:
• RECEIPTS FROM ISSUING NEW SHARES OR BONDS
• RECEIPTS FROM NEW BANK LOAN
• PAYMENTS FOR BUY-BACK OF SHARES
• REPAYMENTS OF LOANS
• PAYMENTS OF INTEREST AND DIVIDEND
CONSTRUCTING A CASH FLOW STATEMENT
1. DETERMINE THE NET CHANGE IN CASH
 COMPARE BEGINNING AND ENDING BALANCE

2. IDENTIFY ALL TRANSACTIONS OF THE PERIOD LEADING TO A CHANGE IN CASH

 DIRECT: ANALYZE MOVEMENTS IN THE ACCOUNTS OF CASH (EQUIVALENTS) TRANSACTION BY TRANSACTION
 INDIRECT: EXPLAIN NET CHANGE OF CASH BY ANALYZING ALL OTHER ACCOUNTS, KNOWING THAT EACH
TRANSACTION WITH AN IMPACT ON CASH ALSO AFFECTS A NON-CASH ACCOUNT

3. USE THE INFORMATION (OF STEP 1 AND 2) TO CONSTRUCT A CASH FLOW

STATEMENT ACCORDING TO THE FORMAL RULES
 Operating
Activities

Cash Inflow Cash Outflow

Collection Payment of
Cash Payment of
Cash sales from Other income payables to
purchases expenses
receivable creditors
 Financing
Activities

Cash Inflow Cash Outflow

Payment of dividends
Proceeds from loans
Proceeds from Payment of loans and to stockholders and Redemption of
and long term
issuance of shares borrowings interest expense on preference shares
borrowings
borrowings
APPLYING STEP 2
• INFORMATION FOR OPERATING CASH FLOW IS PRIMARILY DERIVED FROM BALANCES IN THE IS, WHILE
INFORMATION FOR THE TWO OTHER PRINCIPAL CATEGORIES COMES FROM THE BALANCE SHEET (AND
DETAILS IN THE NOTES)

• MOVEMENTS IN THE ACCOUNTS INDICATE A CHANGE IN FINANCIAL POSITION AND FURTHER

EXAMINATION IS NEEDED TO DETERMINE IF THEY HAD A CASH IMPACT
• CHECK IF BALANCES HAVE BEEN IMPACTED BY “ACCRUAL-BASED ADJUSTMENTS” OR OTHER “NON-CASH
ACTIVITIES”
CLASSIFYING BALANCE SHEET MOVEMENTS AS
INFLOWS OR OUTFLOWS OF CASH
Assets Equity/liabilities

Increase Outflow Inflow

Decrease Inflow Outflow

PRESENTATIONAL CHOICES
• INTEREST PAID CAN BE CLASSIFIED UNDER EITHER OPERATING OR FINANCING ACTIVITIES
• INTEREST AND DIVIDENDS RECEIVED CAN BE INCLUDED IN EITHER OPERATING OR INVESTING CASH
FLOWS

• STARTING FROM NET PROFIT OR OPERATING PROFIT UNDER THE INDIRECT METHOD (WITH IMPLICATIONS
FOR THE ADJUSTMENTS TO BE MADE)