How to prepare a Cash Flow Statement
There are 3 Types of Financial Statements Income statement
Type of Financial Statements
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Statement of Revenue, Expenses and Net profit
Balance sheet
Statement of Financial position (Assets and Liabilities)
Cash flow statement
Statement of Cash inflows and outflows
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The Financial Statements are linked to each other Income statement
` Balance sheet
`
Cash flow statement
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Cash flow statement - Example
• We have the income statement and balance sheets of ABC Limited for year ended Dec 2019 and Dec 2018.
• From these financial statements, we are asked to prepare the cash flow statement of the Company.
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Income statement of ABC Limited Particulars Revenues Less: Cost of goods sold Gross profit Selling and marketing expenses Research and development expenses EBITDA Depreciation Operting income Interest Profit before tax Taxes Net profits
Dec-18 1,000 (600) 400 (100) (50) 250 (100) 150 (10) 140 (42) 98
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Dec-19 2,500 (600) 1,900 (300) (200) 1,400 (200) 1,200 (25) 1,175 (353) 823
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 (1/3)
• This is the most important portion of the cash flow statement. • It shows how much cash flows the company has generated from its business operations.
• Cash flow from operations is linked both to the income statement and Balance sheet of the Company.
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How to calculate CFO • Start with the Net Income • Add: Non-cash expense (Depreciation and Amortization) • Add/ Less: Interest paid/ Interest received • Add/Less: Changes in Working capital
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Cash Flow from Operating activities (2/3)
How to calculate CFO
• Start with the Net Income • Add: Non-cash expense (Depreciation and Amortization) • Add/ Less: Interest paid/ Interest received • Add/Less: Changes in Working capital
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Cash Flow from Operating activities (3/3) How to calculate CFO • Start with the Net Income • Add: Non-cash expense (Depreciation and Amortization) • Add/ Less: Interest paid/ Interest received • Add/Less: Changes in Working capital •
Increase in Current assets (inventory, Accounts receivable) is a cash outflow and vice-versa.
•
Similarly, increase in Current Liabilities Accounts is a cash inflow and vice-versa.
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Summing up all these components give us the cash flow from operations, which in our example is 781 for ABC Limited. Mobile: 9650010925
Cash Flow from Investing activities (1/2) Cash flow from Investing activities includes; • Cash flow from investing activities shows how much the company has invested in future growth.
Capex Cash paid for acquisition of other businesses
• It is generally negative as it is a cash outflow from the business.
Investment in securities
• This is more linked to the balance sheet of the company.
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Sale of assets/ business in cash
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Cash Flow from Investing activities (2/2)
Calculation of Cash flow from Investing Activities of ABC Limited
(-) Capex made for growth
(-) Investment in securities
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Cash flow from Investing Activities in our example is (600) for ABC Limited.
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Cash Flow from Financing activities (1/2) Cash flow from Financing activities includes; • This section summarizes transactions that involve raising or repayment of capital. • Raising capital could be done by issuance of new shares or borrowing through debt financing. Repayment includes, repayment of debt or share repurchases.
• This also includes interest payments to debt financiers and payment of dividends to shareholders. Email: Support@skillfinlearning.com
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Issuance of Shares
Loan taken/ Repaid Interest payment Dividends Paid to shareholders
Share buyback
Cash Flow from Financing activities (2/2)
• In our example, no new equity financing has been done during the period. • There is additional funding through debt financing. • Also, there is interest payment on debt, which we had added back while calculating cash flow from operations.
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Cash flow from Financing Activities in our example is 275 for ABC Limited.
Net cash Change
Cash flow statement Cash flow from Operating Activities Net Profit Depreciation
• The sum of all the three cash flows give us the net changes in cash during the period. • When we add the net cash changes to the opening cash balance, we get the closing cash balance for ABC Limited.
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Increase/ Decrease in Working capital -Inventory increase -Accounts receivable increase -Accounts payable increase -Accrued Liability increase Interest paid
Dec-19 823 200
(307) (100) 100 40 25
Cash flow from Operating activities
781
Cash flow from Investing Activities Capital expenditure Other Investments Cash flow from Investing activities
(500) (100) (600)
Cash flow from Financing Activities -Interest paid -Increase in Long term debt Cash flow from Financing activities Net Cash inflow/ (outflow) Opening cash balance Closing cash balance
(25) 300 275 456 55 511
Net cash Change in Cash flow statement should tie to Cash reported in the balance sheet Cash flow statement Cash flow from Operating Activities Net Profit Depreciation Increase/ Decrease in Working capital -Inventory increase -Accounts receivable increase -Accounts payable increase -Accrued Liability increase Interest paid
Dec-19 823 200
(307) (100) 100 40 25
Cash flow from Operating activities
781
Cash flow from Investing Activities Capital expenditure Other Investments Cash flow from Investing activities
(500) (100) (600)
Cash flow from Financing Activities -Interest paid -Increase in Long term debt Cash flow from Financing activities Net Cash inflow/ (outflow) Opening cash balance Closing cash balance
(25) 300 275 456 55 511
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Conclusion
• This is how we can easily prepare a cash flow statement, with the available income statement and balance sheet.
• You can use this method for financial modeling also. • To learn more about Cash flow statement Click Here
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