5 cash flow Flashcards
(8 cards)
Cash Equivalent
What is available to you. What you quickly can convert into cash.
EX:
EX: Treasury bills OR commercial paper
NOT cash equivalent:
Receivables is generally not cash equivalent - can turn into bad investment and is not liquid.
Ordinary shares
Bank deposit that is withdrawn.
What is a cash flow statement
It is a financial statement that gives info about inflow and outflow of the cash in a period.
It show your liquidity + changes in assets and equity (how much of the company belongs to the owners (shareholders) after all debts have been paid).
What sections are there?
Operating activities: Cash that comes in related to core buisness operations.
EX: cash received from customers and cash paid to suppliers and employees
KEY: positive = we know we are making profit.
Investing activities: cash flow relevant to investment in long-term assets
KEY: Key: not the value of non current assets, but the actual cash you paid for getting it or cash got from selling it.
CAN be negative - betyder ikke nødvendigvis er dårligt - er de igang med at invistere.
Financing activities: cash flow related to the companys financing activities.
EX borrowings, repaying debt, paying dividends.
KEY: Vil tit være negative fordi de låner penge - dog ikke nødvendigvis dårligt
What will do do if you get a negative cash flow?
You need to break down the items and see what is resulting a negative outcome.
Positive: you have money
Negative: you don’t have money. Spending far more than you have
How do you prepare a cash flow statement?
There are 3 steps in it.
- step: Deduce the net cash flow from operating activities.
Here you can use the direct or indirect method.
- step: Deduce net cash flow from investing activities.
Here you identify cash spend or recived from investment.
OUTFLOW: investment from buying new property, purchase of investment etc.
INFLOW: investment inflow like sale of investment
- Deduce net cash flow from financing activities: Identify cash transactions involving raising captial, borrowing capital and repaying capital.
KEY: find the info from balance sheet and income statement.
OBS: Always find out if there is additional information that should be added.
What is the indirect method?
Relies in the fact, that broadly, sales revenue before tax is inflow and outflow is expenses.
What is the direct method?
The direct method is an analysis of the cash records picking out all payments and receipts relating to operating activities.
KEY important to have all the information. Sometimes all is not recorded in income and balance sheet.
In pracsis we do this:
Profit before tax (after interest) + depreciation + interest expense – increase in inventory + decrease in trade receivables + increase in trade payable – interest paid – tax paid – dividend paid
Why do we do cash flow statement?
It show the main source of cash.
Tracking the cash movements over several periods may reveal financing and investing patterns and may help predict future management action.
Show if it is positive or negative. Are we making money?
