Cash Flows and Financial Analysis. Chapter 3. © 2003 South-Western/Thomson Learning. Financial Information—Where Does It Come From, etc . Financial information is the responsibility of management Created by within-firm accountants
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© 2003 South-Western/Thomson Learning
Q: Suppose Joe Jones has after-tax income of $50,000 and spends $40,000 on normal living expenses during the year. Also assume that at the beginning of the year he had a bank balance of $10,000 and no other assets or liabilities. Further, assume that during the year he bought a new car costing $30,000, financing $25,000 at the bank with a car loan. At the end of the year he has $15,000 in the bank. Generate a Statement of Cash Flows for Joe.
ExampleHow the Statement of Cash Flows Works—Preliminary Examples
A: Inflows of cash are known as sources and outflows are known as uses. The Statement of Cash Flows will show how Joe ended up with $15,000 in his bank account.
Joe generated a net source of cash of $10,000, or the difference between his income and normal living expenses. He also experienced an inflow of $25,000 from the car loan and used $30,000 to buy the car. Thus, Joe’s Statement of Cash Flows is:
Cash used on living expenses
Net source of cash from income
Source of cash from loan
Use of cash to buy auto
Net inflow/(outflow) of cash
Beginning cash balance
Net cash flow
Ending cash balance
$15,000How the Statement of Cash Flows Works—Preliminary Examples
A successful business has to withdraw cash to finance growth and replace worn-out assets, pay taxes and for profit.
Product is converted into cash, which is transformed into more product, creating the cash conversion cycle.
Also assume firm paid a $500 dividend and sold stock for $800 during the year.
Focus of activities
is generating net
beginning of a
While the firm was profitable, it still had to borrow money and sell stock to finance the increase in Fixed Assets.
States that to run a business well, a firm must manage costs and expenses as well as generate lots of sales per dollar of assets.
Related to the proportion to which the firm is financed by other people’s money as opposed to owner’s money.Du Pont Equations