CASH FLOW ANALYSIS
-examination or analysis of the different
inflows of the cash to the company and the
outflow of the cash from the company during
the period under consideration from the
different activities which include operating
activities, investing activities and financing
activities.
Three Cash Flow Activities
➔ Cash Flow from Operations
➔ Cash Flow from Investing
➔ Cash Flow from Financing
“Happiness is a positive Cash Flow” is certainly true.
Although net income provides a long-term measure of of
a company’s success and failure, cash is its lifeblood.
Without cash, the company will not survive.
.
Statement of Cash Flows measures
Business Firm’s
> Financial Liquidity (FL)
>Financial Flexibility (FF)
FL- refers to the
measures to cash of
assets and liabilities.
FF - refers to a company’s ability
to respond and adapt to financial
adversity and unexpected needs
and opportunities.
Financial Liquidity
➔ Current cash debt coverage ratio is a liquidity ratio that The higher the current
measures the relationship between net cash provided by cash debt coverage
ratio, the less likely a
operating activities and the average current liabilities of the company will have
company. It indicates the ability of the business to pay its liquidity problems
current liabilities from its operations.
➔ It is computed by the following formula:
Current cash debt coverage ratio=
➔ Net cash provided by operating activities/ Average current
liabilities
Financial Flexibility
➔ Cash debt coverage ratio shows how much of the
The higher the cash
company’s total liabilities can be covered (paid) with net debt coverage ratio, the
less likely a company
cash from operating activities. In other words, this ratio is will experience
one of the measures of the company’s financial flexibility difficulty in meeting its
obligations as they com
and stability. This ratio is calculated by dividing net cash due.
provided by operating activities by the average total
liabilities.
➔ It is computed by the following formula:
Cash debt coverage ratio=
➔ Net cash provided by operating activities/ Average total
liabilities
FREE CASH FLOW
-the amount of
discretionary cash
flow a company has.
FREE CASH FLOW
-Investors use free cash flow to
measure whether a company might
have enough cash, after funding
operations and capital expenditures, to Tip
pay investors through dividends and Ideally, speak of people
in very different
share buybacks. situations, but where
each could benefit from
your solution.
Net Cash Flow provided by operating activities
Less:
Capital Expenditures
Dividends
= FREE CASH FLOW
Calculating Cash Flow from Operating
Calculating Cash Flow from Operating
I
Tip
OPERATING ACTIVITIES
Net Income:
Add back Non-Cash Expenses
(depreciation/loss/depletion/amortization etc
Less: Income Not involving cash
(gain on sale of assets or liab/gain on equity, etc.)
Add (Less):Decrease in CA (Increase in CA)
Add (Less):Increase in CL (Decrease in CL)
Net cash provided (used) for Operating Activities
Tip
OPERATING- CURRENT ASSETS (except cash marketable securities
and non-trade assets)
CURRENT LIABILITIES (except financing and
non-operating accts. such as bank loan and current maturities of
long-term debt)
INVESTING- NONCURRENT ASSETS
FINANCING- NON CURRENT LIABILITIES
EQUITY
The following information is available for Ubbie’s jewelry and Gift Store:
Net income P 5, 000
Depreciation expense 2, 500
Increase in deferred tax liabilities 500
Decrease in cash 3, 000
Increase in marketable securities 1, 000
Decrease in accounts receivable 2, 000
Increase in inventories 9, 000
Decrease in accounts payable 5, 000
Increase in accrued liabilities 1, 000
Increase in property and equipment 14, 000
Increase in bonds payable 19, 000
Decrease in long-term notes payable 4, 000
Use the indirect method to answer following:
1. What is net cash flow from operating activities?
3. What is net cash flow from financing activities?
a. P(3,000) c. P 5,000
a. P 15,000 c. P 17,000
b. P(1000) d. P 13,000
b. P (15,000) d. P (14,000)
2. What is net cash flow from investing activities?
4. What is the change in cash?
a. P 14,000 c. P 21,000
a. P(3,000) c. 2,000
b. P (14,000) d. P (16,000)
b. P 3,000 d. P (2,000)
