Cash Flow Analysis 7 CHAPTER
7 CHAPTER Cash Flow Analysis
Statement of cash flows Relevance of Cash Flows Cash Defined refers to cash and cash equivalents. Cash equivalents are short-term, highly liquid investments that are(1)readily convertible to known amounts of cash, and (2) near maturity (typically within 3 months) with limited risk of price changes due to interest rate shifts
Statement of Cash Flows Relevance of Cash Flows Cash Defined -- refers to cash and cash equivalents. Cash equivalents are short-term, highly liquid investments that are (1) readily convertible to known amounts of cash, and (2) near maturity (typically within 3 months) with limited risk of price changes due to interest rate shifts
Statement of cash Flows Relevance of Cash Flows Cash is the beginning and the end of a com pany's operating cycle Net cash flow is the end measure of profitability Cash repays loans, replaces equipment, expands facilities, and pays dividends 幽到 Analyzing cash inflows and outflows helps assess liquidity, solvency, and financial flexibility Liquidity is the nearness to cash of assets and liabilities Solvency is the ability to pay liabilities when they mature Financial flexibility is the ability to react to opportunities and adversities
Statement of Cash Flows Relevance of Cash Flows Cash is the beginning and the end of a company’s operating cycle. Net cash flow is the end measure of profitability. Cash repays loans, replaces equipment, expands facilities, and pays dividends. Analyzing cash inflows and outflows helps assess liquidity, solvency, and financial flexibility. Liquidity is the nearness to cash of assets and liabilities. Solvency is the ability to pay liabilities when they mature. Financial flexibility is the ability to react to opportunities and adversities
Statement of cash Flows Relevance of Cash Flows Statement of cash flows (SCF) helps address questions sucl h as How much cash is generated from or used in operations? What expenditures are made with cash from operations? How are dividends paid when confronting an operating loss? What is the source of cash for debt payments? What is the source of cash for redeeming preferred stock? How is the increase in investments financed? What is the source of cash for new plant assets? Why is cash lower when income increased? What is the use of cash from new financing?
Statement of Cash Flows Relevance of Cash Flows Statement of cash flows (SCF) helps address questions such as: How much cash is generated from or used in operations? What expenditures are made with cash from operations? How are dividends paid when confronting an operating loss? What is the source of cash for debt payments? What is the source of cash for redeeming preferred stock? How is the increase in investments financed? What is the source of cash for new plant assets? Why is cash lower when income increased? What is the use of cash from new financing?
Statement of cash Flows Cash Flow Relations Illustration: Consider two consecutive years' balance sheets divided into (1) cash, and(2)all other balance sheet accounts Accounts Year 1 Year 2 Cash and cash equivalents S3000 S5.000 Noncash accounts Noncash current assets s(9,000)$(1100 Noncurrent assets (6,000 (8,000) Current liabilities 8.000 10.000 Long-term liabilities 3.000 5.000 Equity accounts 7000 9000 Net noncash balance $3,000 5,000 Note Change in cash from Year 1 to Year 2(increase of $2,000)= Change in noncash balance sheet accounts ($2, 000 increase)from Year 1 to Year 2
Statement of Cash Flows Cash Flow Relations Illustration: Consider two consecutive years’ balance sheets divided into (1) cash, and (2) all other balance sheet accounts: Accounts Year 1 Year 2 Cash and cash equivalents $3,000 $5,000 Noncash accounts: Noncash current assets $(9,000) $(11,000) Noncurrent assets (6,000) (8,000) Current liabilities 8,000 10,000 Long-term liabilities 3,000 5,000 Equity accounts 7,000 9,000 Net noncash balance $3,000 $5,000 Note: Change in cash from Year 1 to Year 2 (increase of $2,000) = Change in noncash balance sheet accounts ($2,000 increase) from Year 1 to Year 2