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Cash Flow Analysis

Cash flows are categorized into operating, investing, and financing activities. Estimating cash flows requires considering relevance, incremental cash flows, timing, consistency, and tax effects, while factors such as economic conditions and market demand influence these estimates. Understanding the relationship between profit and cash flow is crucial, as profit includes non-cash items and is based on accrual accounting, whereas cash flow focuses on actual cash transactions.

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8 views2 pages

Cash Flow Analysis

Cash flows are categorized into operating, investing, and financing activities. Estimating cash flows requires considering relevance, incremental cash flows, timing, consistency, and tax effects, while factors such as economic conditions and market demand influence these estimates. Understanding the relationship between profit and cash flow is crucial, as profit includes non-cash items and is based on accrual accounting, whereas cash flow focuses on actual cash transactions.

Uploaded by

pajjushiravanti8050
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

Cash Flows: Key Concepts and Analysis

Classification of Cash Flows

Cash flows are classified into three main categories:

1. Operating Activities: Cash flows from the core business operations (e.g., cash received from

customers, payments to suppliers).

2. Investing Activities: Cash flows related to the acquisition or disposal of long-term assets (e.g.,

purchase of equipment, sale of investments).

3. Financing Activities: Cash flows from changes in the size and composition of equity and

borrowings (e.g., issuing shares, repaying loans).

Principles of Cash Flows Estimation

1. Relevance: Consider only cash flows relevant to the decision.

2. Incremental Cash Flows: Include only those cash flows that occur as a result of the project.

3. Timing: The exact timing of cash flows must be considered.

4. Consistency: Use consistent assumptions in estimates.

5. Tax Effects: Include the impact of taxes on cash flows.

Factors Influencing Cash Flows Estimation

1. Economic Conditions

2. Market Demand

3. Competition

4. Regulatory Environment

5. Operating Efficiency

6. Input Costs

7. Technological Changes

Relationship Between Profit and Cash Flow

Profit is the accounting measure of performance, while cash flow represents actual inflow and
outflow of cash.

Key differences include:

1. Profit includes non-cash items like depreciation.

2. Cash flow considers changes in working capital.

3. Profit is based on accrual accounting; cash flow is based on cash transactions.

Steps in Discounted Cash Flows Analysis

1. Forecast future cash flows.

2. Determine the appropriate discount rate.

3. Discount the projected cash flows to the present value.

4. Sum the present values to get the total value of the investment.

5. Compare with initial investment to determine viability.

Components of Cash Flows

1. Cash Inflows: Revenues, loans, investments.

2. Cash Outflows: Expenses, asset purchases, debt repayment.

3. Net Cash Flow: Difference between inflows and outflows over a period.

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