Accounting - cash flows

statement of cash flows

statement that summarizes the amount of cash flowing into and out of a company.

statement of cash flows

all cash inflows a company receives from its ongoing operations and external investment sources.

statement of cash flows

This statement shows the net increase or decrease in cash during the period and the cash balance at the end of the period.

statement of cash flows

It helps the creditors in determining how much cash is available (referred to as liquidity) for the company to fund its operating expenses and pay down its debts

1. operating activities

2. financing activities

3. investing activities

main components of cash flows

operating activities

providing services, andproducing and delivering goods

cash effects of transactions and other events that determine the net income

1. direct method

2. indirect method

operating activities

direct method

the equity’s net cash provided by operating activities is obtained by adding the individual operating cash inflows.

indirect method

derives the net cash provided by operating activities by adjusting net income for revenue and expense items not resulting from cash transactions.

The adjustment begins with net income followed by the addition of expenses and charges that did not entail cash payments

financing activities

obtaining resources from owners and creditors

investing activities

making and collecting loans; aquiring and disposing of investments in debt or equity securities; and obtaining and selling of property and equipment and other productive assets.

ncf=tci-tco

formula and calculation of cash in flow

financial statement analysis

process of evaluatng risks, performance, financial health, and future prospects of a busiiness

1. horizontal analysis

2. vertical analysis

3. financial analysis

analysis techniques

Trend Analysis

examines financial data over multiple periods to observe patterns and growth over time. Each period is expressed as a percentage of a base year value.

(Current Year/Base Year)*100

Trend Analysis Formula

horizontal analysis

also known as trend analysis

horizontal analysis

A technique for evaluating series of financial statement data over a period of time with the purpose of determining the increase or decrease that has taken place.

horzontal analysis

It uses financial statements of two or more periods.

All line items on the FS may be subjected to horizontal analysis.

Peso change = Balance of Current Year - Balance of Prior Year

Percentage change= Peso Change / Balance of Prior Year

Formulas for Horizontal Analysis

vertical analysis

also called common size analysis

vertical analysis

A technique that expresses each financial statement item as a percentage of a base amount.

(Item/Net Sales)*100

(Item/Total Assets)*100

Vertical Analysis Formula

total assets

base amount of statement of financial position

Statement of financial position

where the analyst can infer the composition of assets and company’s financing mix

statement of comprehensive income

reveals how gross sales is used up by expenses

financial ratios

Can be used to compare a company’s current financial position and performance with those of past years and identify strengths and weaknesses.

financial ratios

It allows comparison of different companies in different industries.

financial ratios

Their use is not only limited to management but to stockholders and creditors as well.

financial ratios

Some creditors or financial institutions require the presentation of certain ratios before they extend credit. This is to ascertain the return of their money together with the interest.

1. liquidity

2. solvency

3. profitability

4. market value

four categories of financial ratios

liquidity ratios

ability of a company to settle its current obligations as they fall due

solvency ratios

ability of a company to settlel its non current or long term obligations and the interest related to it

profitability

measure the company’s operating performance as a return of investment and gauges manaement’s efficiency in using the company resources to generate revenue

market value or valuation

measure the company’s potential for future earnings, dividend payments, and stock price growth

inventory turnover

measures the number of times a company’s inventory is sold and replaced during the year

1. current ratio

2. quick ratio

3. recievable turnover

4. average collection period

5. inventory turnover

6. average sales period

7. working Capital

common types of liquidity ratios

quick ratio

Also known as the acid test ratio, measures immediate liquidity with the ability to pay current liabilities with the most liquid assets.

Quick Ratio = Cash + Short term Investments+ Trade Receivables / Current Liabilities

formula for quick ratio

Average Inventory = Beginning Inventory + Ending Inventory / 2

formula for average inventory

Inventory Turnover = Cost of Goods Sold / Average Inventory

formula for inventory turnover

average collection period

Also known as day’s sale outstanding, is the approximate number of days it takes a business to collect its receivables from credit or account sales.

Average Collection Period=360 Dats / Trade Receivable Turnover

Average Collection Period= Average Receivables / Average Daily Sales

formula for average collection period

Average Daily Sales = Annual Sales/ 360 Days

formula for average daily sales

recievable turnover

Measures the efficiency of collecting the amount due from credit customers.

Receivable Turnover= Net Credit Sales / Average Trade Receivable

formula for recievable turnover

Average Trade Receivable= Beginning Trade Receivable+ Ending Trade Receivable / 2

formula for average trade recievable

recievable turnover

measures the efficiency of collecting the amount due from credit customers

Receivable Turnover= Net Credit Sales / Average Trade Receivable

formula for recievable turnover

Average Trade Receivable= Beginning Trade Receivable+ Ending Trade Receivable / 2

formula for average trade recievable

average sales period

average time to convert inventory to sales

Average Sales Period= 360 Days / Inventory Turnover

formula for average sales period

working capital

measures short term liquidity of a company

Working Capital= Current Assets- Current Liabilities

formula of working capital

1. debt ratio

2. equity ratio

3. debt to equity ratio

4. times interest ratio

common types of solvecy ratios

debt ratio

measures business liabilities as a percentage of total assets

Debt Ratio = Total Liabilities / Total Assets

formula of debt ratio

equity ratio

Measures the percentage of total assets financed by the owner’s investment

Equity Ratio = Total Equity / Total Assets

formula of equity ratio

debt to equity ratio

Measures the financing provided by the creditors against those provided by the owner

Debt to Equity Ratio = Total Liabilities / Total Equity

formula of debt to equity ratio

time interest earned

Measures the company’s ability to pay the interest charged to the company for its outstanding liabilities

Time Interest Earned =Income Before Interest and Taxes / Interest Expense

formula for time interest earned

1. gross profit ratio

2. operating profit ratio

3. net profit ratio

4. returns on assets

common types of profitability

gross profit ratio

Measures the percentage of peso sales earned after deducting cost of goods sold.

Gross Profit Ratio = Gross Profit / Net Sales

formula of gross profit ratio

operating profit margin

Measures the percentage of income earned after deducting the cost of sales and the operating expenses

Operating Profit Margin = Operating Income / Net Sales

formula of operating profit margin

net profit margin

Measures the percentage of net income earned from net sales after all other income has been added and all operating expenses and other expenses including income taxes have been paid

Net Profit Margin = Net Income / Net Sales

formula of net profit margin

returns on assets

Measures the company’s efficiency in using its level of investment in assets in order to generate income

Returns on Assets = Net Income / Average Total Assets

formula for returns on assets

Financial statement analysis

can be used to compare a company’s current financial position and performance with those of past years and identify strengths and weaknesses.

Financial statement analysis

allows for comparison of different companies in different industries

Financial statement analysis

used by management, stockholders and creditors.

1. Cash received from customers.

2. Refunds from suppliers.

3. operational receipts.

4. Payments to suppliers for goods and services.

5. Employee salaries and wages.

6. Interest paid on loans.

7. Income tax payments.

8. Sale of property, equipment, or investments.

9. Proceeds from the sale of business assets

10. Purchase of property, plant, and equipment (PPE).

11. Investments in other businesses or assets.

12. Issuance of shares or bonds.

13. Proceeds from loans or borrowings.

14. Dividend payments to shareholders.

15. Repayment of loans.

16. Repurchase of company shares.

Examples of Cashflow

1. Converting debt to equity.

2. Asset acquisition through issuing stock or debt.

3. Non-cash exchanges, such as bartering of assets.

Non-Cash Activities

1. Cash received from customers.

2. Refunds from suppliers.

3. Other operational receipts.

Inflows of Operating Activities

1. Payments to suppliers for goods and services.

2. Employee salaries and wages.

3. Interest paid on loans.

4. Income tax payments.

Outflows of Operating Activities

1. Sale of property, equipment, or investments.

2. Proceeds from the sale of business assets.

Inflows of Investing Activities

1. Purchase of property, plant, and equipment (PPE).

2. Investments in other businesses or assets.

Outflpws of investing Activiites

1. Issuance of shares or bonds.

2. Proceeds from loans or borrowings.

Inflows of Financing Activities

1. Dividend payments to shareholders.

2. Repayment of loans.

3. Repurchase of company shares.

Outflows of Financing Activities

Cash Flows

Transactions that directly affect cash accounts

Non-Cash Transactions

Do not involve actual cash movement but are important for financial statements.