Understanding Cash flow statement
Contents
• What is Cash Flow Statement? • Is Cash Flow equal to profit? • Types of Cash Flows
• Cash flow Example – Alphabet Inc./ Google
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What is a Cash flow statement? Financial Statements •
•
Cash flow statement is filed by Corporates in their filings along with the Income Statement and the Balance Sheet.
The Cash flow statement shows how efficiently the company is managing its cash. How much cash came in the business during a time period and how much of it was expensed.
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Income Statement
Statement of Revenues, Expenses and Net profit
Balance sheet
Statement of Assets and Liabilities
Cash flow statement
Statement of Cash inflows and Outflows
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Is cash flow equal to profit?
Cash Flow
≠
Profit
This is because of accounting methodology. • Companies usually follow accrual accounting • Revenue is recorded when earned and expenses are recorded when incurred. Earned revenue and incurred expense may not result in immediate cash inflow/ outflow • Also, the income statement includes non-cash income/expenses which does not form part of the cash flow statement
It is important to analyze the Cash Flow Statement to understand the actual cash generated and retained from business operations Email: Support@skillfinlearning.com
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Types of Cash Flows?
Cash flow from Operating Activities
Cash flow statement
Cash flow from Investing Activities Cash flow from Financing Activities
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Cash flow from Operating Activities (CFO)
• Cash flow from operating activities (CFO) explains the cash generated from day to day operating activities. • Operating activities include manufacturing and selling products or providing services to customers, payment for purchases, employee salaries, taxes and other operating expenses.
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Methods to calculate CFO Direct Method
Indirect Method
Cash flow from Operating Activities (CFO) Direct Method
Indirect Method • This method requires changing accrual accounting to cash basis • Easy to prepare/ less time consuming • Companies usually use this method to prepare CFO statement
• This method uses actual cash inflows and outflows from operations • More intuitive • Time consuming
Statement Approach • • • •
Statement Approach
Cash Sales Add: Payment received from customers Less: Payment made to vendors Less: Payment made for expenses, taxes etc
• • • •
Net Income Add: Depreciation and Amortization Add/ Less: Interest paid/ Interest received Add/Less: Changes in Working capital
Both the methods give the same result Email: Support@skillfinlearning.com
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Cash flow from Investing Activities (CFI) Cash flow from Investing activities includes; Capex
• CFI shows the cash expensed by the company in investments made for future growth.
Cash paid for acquisition of other businesses
• Cash flow from investing activity is generally negative as it is a cash outflow.
Investment in securities Sale of assets/ business in cash
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Cash flow from Financing Activities (CFF) Cash flow from Financing activities includes; Issuance of Shares
Loan taken
• CFF includes the transactions that involve raising or repayment of capital (both through equity and borrowings).
Loan Repaid Dividends Paid to shareholders
Share buyback Email: Support@skillfinlearning.com
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Cash balance Cash balance reconciliation is found at the bottom of the Cash flow statement Opening cash
+/- Cash flows from operating activities +/- Cash flows from investing activities +/- Cash flows from financing activities Cash balance at the end of the period Email: Support@skillfinlearning.com
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Example – Alphabet Inc.
Cash flow from Operating Activities
Cash flow from Investing Activities
Cash flow from Financing Activities
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Example – Cash flow from Operating Activities – Alphabet Inc.
Reported Net income
Non-Cash Expenses Added back
Changes in Working capital (Current Assets and
Current Liabilities) Cash flow from Operating activities
Google has generated $54.5 billion in cash through operations Email: Support@skillfinlearning.com
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Example – Cash flow from Investing Activities – Alphabet Inc.
Growth Capex Purchase and Sale of investments Cash Acquisitions
Cash flow from Investing activities
Google’s Cash flow from investing activities is ($29.5) billion in 2019
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Example – Cash flow from Financing Activities – Alphabet Inc.
Payment to shareholders
Issuance and repayment of debt
Cash flow from Financing activities
Google’s Cash flow from Activities is ($23.2) billion in 2019
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Example – Cash balance reconciliation – Alphabet Inc.
Increase in cash from CFO, CFI and CFF activities Closing cash balance
Closing cash balance ties with the reported cash balance in the balance sheet
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