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Understanding Cash Flow Activities in Financial Accounting

Explore the importance of cash flow activities in financial accounting, covering operating, investing, and financing aspects, with tools for analysis, guidelines for presentation, and red flags to watch for. Learn how to assess cash sufficiency and conversion cycles.

jerry-cook
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Understanding Cash Flow Activities in Financial Accounting

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  1. Session 21Statement of Cash Flows FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  2. Businesses are like Fruit Trees Fruit = Operating Activities Trunk & Branches = Investing Activities Roots = Financing Activities FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  3. Statement of Cash Flows • Operating • Working capital, day-to-day transactions • Direct versus indirect methods • Investing • Non-current assets—mainly PP&E and marketable securities • Financing • Debt, equity and dividends paid FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  4. Target Your Efforts • Solvency assurance • Wealth enhancement • Performance improvement FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  5. Start with the 3 P’s • Planning • Processing • Presenting FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  6. Include the Trifecta: Q-S-T • Q: Quantitative analysis • S: Strategic assessment • T: Tactical feasibility FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  7. Tools for Financial Statement Analysis • Ratio analysis • Trend analysis • Common-size analysis • Base period analysis • Comparative analysis • Horizontal and vertical analyses FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  8. A Financial Statement Approach • Look for key relationships • Focus on spending drivers • Don’t overlook the Statement of Cash Flows • Remember to measure trends • Tell a story FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  9. Guidelines for a Presentation • Clarity • Accuracy • Simplicity • Visually friendly • Limit page content FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  10. Cash Flow Red-Flags • Receivable and inventory growth rate exceeds sales growth rate • Payables growth rate exceeds inventory growth rate • Current liabilities grow faster than sales • Sustained operating losses (negative net income) FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  11. Cash Flow Red-Flags (cont’d) • Negative operating cash flow • Capital expenditures exceed operating cash flow • Sustained capital expenditures reductions • Sustained sales of marketable securities in excess of purchases • Substantial shift from long to short term borrowing • Dividend reduction or elimination FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  12. Cash Sufficiency Ratio • Cash Flow From Operations + Interest + TaxesPPE + Debt Servicing + Taxes + Dividends • Should be greater than 1 • Can easily disaggregate • Different footprints for different development stages FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  13. Cash Conversion Cycle • Cash conversion cycle • Days in payables ≥ DSO + Days in inventory FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

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