David Echeverry

2022

Fundamentals of Finance
Last time and preview of
today
Last time: time mismatches
• Income vs. cash collection
• Expense vs. payment
• Treasury exercise
• P&L: the company is solvent
• Treasury plan: potential liquidity problems
Today: statement of cash flows
DNA of a CFO
Career Advice from CFOs Aecon,
UNIT 1
Canadian Tire, Molson-Coors and Walmart
April 2014
Financial Statements
Types of Financial Statements

Balance Sheet

Assets vs. Liabilities (owes)

Shareholder Equity = Assets – Liability

Income Statement

Revenues and Costs

Statement of Cash Flows – our focus

 UNIT 2

Unit 2:
Statement of cash flows
Objectives
2.1 Net income vs. cash flow:
UNIT 2

a. Revenue and collections

b. Expenses and payments
2.2 Calculating cash flow
a. Direct versus indirect method
b. Calculating cash flow activities
c. Cash flow statement
2.3 Cash flow metrics and calculations
a. EBIDTA as a proxy
b. Operating cash flow
c. Free Cash Flow (FCF)
d. Free Cash Flow to Firm (FCFF)
e. Free Cash Flow to Equity (FCFE)
 UNIT 2

2.1 Understanding net income and

cash flow
The difference between net
income and cash flow UNIT 2

To understand the difference between net income and

cash flow, we must first understand:

Revenue and collection

(REVENUE ≠ COLLECTION)

Expenses, cost and payment

(EXPENSES, COST ≠ PAYMENT)
The difference between
revenue and collection UNIT 2

• Revenue = sales
Amount recorded in the process of sale of a product
or provision of a service, i.e. amount generated by
operation activities

• Collection = money in the bank

Cash actually received by the firm

The difference between
expenses and payment UNIT 2

Cost of sales: Resources consumed in the manufacturing

process or in the provision of a service
Examples: labour, raw material

Expense: Resources consumed for the business to

function but not linked to production
Examples: commercial campaign, insurance
Payment: Cash outflow to meet cost or expenses
Example: bank transfers to pay for the commercial
campaign
What is net income?
UNIT 2

NET INCOME = REVENUE - EXPENSES - COSTS

Sometimes referred to as Net Profit

Relates to the real flow of goods and services

Net income is calculated by preparing the income
statement
Helps us to analyse the economic viability of a company
or business, and helps us understand if a project is
profitable or not for its shareholders
Sometimes cost is recorded as part of expense
Income statement: Example
UNIT 2
 Income statement: Example
UNIT 2
Apple Inc.
Consolidated Income Statement
US$ in millions
12 months ended: Sep 26, 2020 Sep 28, 2019 Sep 29, 2018 Sep 30, 2017 Sep 24, 2016 Sep 26, 2015
Products 220,747 213,883 225,847 196,534 — —
Services 53,768 46,291 39,748 32,700 — —
Net sales (legacy) — — — — 215,639 233,715
Net sales 274,515 260,174 265,595 229,234 215,639 233,715
Products (151,286) (144,996) (148,164) (126,337) — —
Services (18,273) (16,786) (15,592) (14,711) — —
Cost of sales (legacy) — — — — (131,376) (140,089)
Cost of sales (169,559) (161,782) (163,756) (141,048) (131,376) (140,089)
Gross margin 104,956 98,392 101,839 88,186 84,263 93,626
Research and development (18,752) (16,217) (14,236) (11,581) (10,045) (8,067)
Selling, general and administrative (19,916) (18,245) (16,705) (15,261) (14,194) (14,329)
Operating expenses (38,668) (34,462) (30,941) (26,842) (24,239) (22,396)
Operating income 66,288 63,930 70,898 61,344 60,024 71,230
Interest and dividend income 3,763 4,961 5,686 5,201 3,999 2,921
Interest expense (2,873) (3,576) (3,240) (2,323) (1,456) (733)
Other income (expense), net (87) 422 (441) (133) (1,195) (903)
Other income (expense), net 803 1,807 2,005 2,745 1,348 1,285
Income before provision for income taxes 67,091 65,737 72,903 64,089 61,372 72,515
Provision for income taxes (9,680) (10,481) (13,372) (15,738) (15,685) (19,121)
Net income 57,411 55,256 59,531 48,351 45,687 53,394
 Income statement example: Spotify
UNIT 2

Net income
 Back to income vs. cash:
Anjelu SL UNIT 2

ANJELU SL

2021 2022 2021 2022

Gross Fixed Assets 1,200,000 € 1,350,000 € Capital 600,000 € 600,000 €
Cumulative amortization 240,000 € 510,000 € reserves - € 49,875 €
Non-current assets 960,000 € 840,000 € Result 71,250 € 231,075 €
Stock mat. Cousins 46,667 € 70,000 € Total Equity 671,250 € 880,950 €
Finished prod stock 86,250 € 106,929 € Long-term debts 600,000 € 400,000 €
Customers 102,083 € 280,500 € Non-current liabilities 600,000 € 400,000 €
Treasury 371,111 € 313,220 € Debts c / p 200,000 € 200,000 €
Current active 606,111 € 770,649 € Providers 71,111 € 98,889 €
Creditor HP 23,750 € 30,810 €
Current Liabilities 294,861 € 329,699 €
Total Assets 1,566,111 € 1,610,649 € Total assets net and passive 1,566,111 € 1,610,649 €

Question: how much money did the company make in 2022?

 Back to income vs. cash:
Anjelu SL UNIT 2

2021 2022
Sales 1,225,000 € 1,683,000 €
materials 380,000 € 570,000 €
mod 230,000 € 313,650 €
cif (excl amort) 185,000 € 129,500 €
gross margin 430,000 € 669,850 €
general expenses 45,000 € 51,750 €
amortization 240,000 € 270,000 €
Operating income-EBIT-BAIT 145,000 € 348,100 €
Interests 50,000 € 40,000 €
Earnings before taxes - BAT95,000 € 308,100 €
Taxes 23,750 € 77,025 €
Net profit for the year 71,250 € 231,075 €

Question: how much money did the company make in 2022?

Summary of today UNIT 2

Today: income statements

• Analyze the economic viability of a business
• Helps understand whether a project is profitable
• Income vs. cash
Next time: cash flow statement
• Cash: direct and indirect method
• Operating, investing and financing
 David Echeverry
2022

Fundamentals of Finance
Who´s financing the business?

WHO RISK RETURN

Equity (investment) Profit/dividends

SHAREHOLDERS Additional (industry+ Company
commitments risk)

Debt repayment /
BANKS Interest rate
insolvency
 Balance sheet UNIT 1

Accounting perspective Financial perspective

NON-OPERATING
ASSETS

EQUITY EQUITY

ASSETS
FINANCIAL
DEBT
BUSINESS
LIABILITIES

 Double accounting: Every change in the balance sheet has a corresponding effect
 The financial perspective explains how the financiers look at the company
Valuation of a company

ENTERPRISE VALUE (BUSINESS)

+ NON-OPERATING ASSETS

- FINANCIAL DEBT

= EQUITY VALUE

Valuation ≠ Book value

 UNIT 2

Unit 2:
Statement of cash flows
Summary of last time and
preview of today UNIT 2

2.1 Net income vs. cash flow:

a. Revenue and collections
b. Expenses and payments
2.2 Calculating cash flow
a. Direct versus indirect method
b. Calculating cash flow activities
c. Cash flow statement
2.3 Cash flow metrics and calculations
a. EBIDTA as a proxy
b. Operating cash flow
c. Free Cash Flow (FCF)
 Income statement example: Spotify
UNIT 2

Net income
 UNIT 2

What is cash flow?

What is cash flow?
UNIT 2
◼ CASH FLOW= COLLECTION MINUS PAYMENTS

◼ Cash flow is based on monetary flow of collections

and payments

◼ It is the result of financial transactions across three

activities:

1. Operating activities

Cash flow for

2. Investing activities
the period
3. Financing activities
Cash flow activities
UNIT 2

1. Operating activities: related to net income

e.g. cash from the sale of goods (revenue) and
cash paid for merchandise (expense) - revenues
and expenses are included in net income

2. Investing activities include cash activities related to

noncurrent assets, including (1) long-term
investments; (2) property, plant, and equipment;
and (3) principal amount of loans to other entities.
e.g. cash from the sale of land and cash paid for an
investment in another company

3. Financing activities: used to fund the company

e.g. transactions involving debt, equity, and
dividends
 Spotify: Cash flow statement
UNIT 2

Cash flow

INITIAL BALANCE

(+/-) CASH FLOWS FROM OPERATING ACTIVITIES

(+/-) CASH FLOWS FROM INVESTMENT ACTIVITIES

(+/-) CASH FLOWS FROM FINANCING ACTIVITIES

(=) FINAL BALANCE
Cash flow statement
UNIT 2

CASH FROM OPERATIONS (BUSINESS)

+NET INCOME

- NON-CASH INCOME
+ NON INCOME CASH

CASH FROM INVESTMENT (BUSINESS)

CASH FROM FINANCING

 Difference between net income
and cash flow UNIT 2

◼ Cash generated is calculated through the cash flow

statement (not income statement)

◼ The cash flow: financial viability of the company

◼ A project could be economically but not financially

viable

◼ In this way, a firm that has a positive net income can

still be generating insufficient cash, and vice versa

Net income differs from cash
UNIT 2
1 • Company X had a net income of $60,000 in year 1
• Bought $60,000 of equipment near end of year
• End of year: $60,000 of net income, $0 cash
2 • Company Y provides $10,000 of services in month 1
• Allows clients to pay 30 days later
• $2,000 of expenses, $1,100 now and $900 in 30 days
• Gives a net income of $8,000
• But cash decreased by $1,100 in month 1
• Month 2:
net income $0 (no revenues - no expenses)
cash increase $9,100 (receipts of $10,000 - payments
of $900)
Spotify: income and cash flow statements

Net income

Cash flow
 UNIT 2

2.2 Calculating cash flow

Preliminary concepts
UNIT 2
Funds Generated
FG = monetary income – expenses
• Traditionally known as cash flow
• FG = net profit + items not involving flow of cash
• These are depreciation, provisions accruals and deferrals

Funds Generated by Operations

FGO = income - operating expenses
• Excludes expenses from financial structure, extraordinary
expenses or income
Calculating cash flow: Direct method
UNIT 2
◼ Collections minus payments

◼ Go to the cash accounting of the cash or bank

statement to see all inflows and outflows

◼ Pro: easy to understand

◼ Pro: Gives a breakdown of the origin of collections and

payments

◼ Con: requires information on all collections and

payments
 Direct method
Income minus out-of-pocket expenses
Cash flow: Direct method FUNDS GENERATED (CASH-FLOW)
(+) Sales 500,000 €
(-) Cost of sales
UNIT 2
225,000 €
(-) Structure 125,000 €
(-) Financial expenses 5,000 €
INCOME STATEMENT (-) Taxes (tax = 25%) 18,750 €
(+) Sales 500,000 € (=) FUNDS GENERATED 126,250 €
(-) Cost of sales 225,000 €
(=) Margin 275,000 € FUNDS GENERATED BY OPERATIONS
(-) Structure 125,000 € (OPERATING CASH-FLOW)
(=) EBITDA 150,000 € (+) Sales 500,000 €
(-) Amortization 60,000 € (-) Cost of sales 225,000 €
(-) Provisions 10,000 € (-) Structure 125,000 €
(=) BAIT (or EBIT) 80,000 € (-) Operating taxes 20,000 €
(-) Financial expenses 5,000 € (=) FUNDS GENERATED BY
130,000 €
(=) BAT 75,000 € OPERATIONS
(-) Taxes (tax = 25%) 18,750 €
(=) Net profit 56,250 € Operating taxes do not take into account the financing
of the company and are calculated as follows:
tax rate x BAIT (or EBIT)
Financial expenses are never operating expenses

FG = FGO - GF + Tax Shield 126,250.00 €

FG = Funds generated
Funds generated by operations
GF = Financial Expense
Tax shield = % tax x GF
Calculating cash flow: Indirect method
UNIT 2
◼ Take the initial and final balances as a reference, then
make adjustments and eliminations to derive cash flow
◼ Part of financial accounting (from the income
statement)
◼ The following documents are required:
1. Initial balance sheet
2. Income statement for the period in question
3. Final balance sheet
◼ Pro: needs less data
◼ Con: more difficult to understand
Cash flow: Indirect method
Indirect method UNIT 2
Profit plus items that have not moved funds

INCOME STATEMENT FUNDS GENERATED (CASH-FLOW)

(+) Sales 500,000 €
(+) Net Profit 56,250 €
(-) Cost of sales 225,000 €
(=) Margin 275,000 € (+) Amortizations 60,000 €
(-) Structure 125,000 € (+) Provisions 10,000 €
(=) EBITDA 150,000 € (=) FUNDS GENERATED 126,250 €
(-) Amortization 60,000 €
(-) Provisions 10,000 €
(=) BAIT (or EBIT) 80,000 €
(-) Financial expenses 5,000 € FUNDS GENERATED BY OPERATIONS
(=) BAT 75,000 € (OPERATING CASH-FLOW)
(-) Taxes (tax = 25%) 18,750 € (+) BAIT (or EBIT) 80,000 €
(=) Net profit 56,250 € (-) Operating taxes 20,000 €
(+) Amortizations 60,000 €
(+) Provisions 10,000 €
(=) FUNDS GENERATED BY
130,000 €
OPERATIONS
So, are funds generated cash generated?
◼ Assume we have some items in the balance
Customers 45,000.00 €
Stocks 30,000.00 €
Providers 50,000.00 €

◼ This means we still have 25,000€ to settle

FUNDS GENERATED (CASH-FLOW)
(+) Sales 500,000 €
(-) Cost of sales 225,000 €
(-) Structure 125,000 € FUNDS GENERATED
(-) Financial expenses 5,000 € (+) FG 126,250 €
(-) Taxes (tax = 25%) 18,750 € (+/-) Settings - 25,000 €
(=) FUNDS GENERATED 126,250 € (=) GENERATED CASH (CG) 101,250 €

FUNDS GENERATED BY OPERATIONS FUNDS GENERATED BY OPERATIONS

(OPERATING CASH-FLOW) (OPERATING CASH-FLOW)
(+) FGO 130,000 €
(+) Sales 500,000 €
(+/-) Settings - 25,000 €
(-) Cost of sales 225,000 €
(-) Structure 125,000 € (=) CASH GENERATED
105,000 €
(-) Operating taxes 20,000 € FROM OPERATIONS (CGO)
(=) FUNDS GENERATED BY
130,000 €
OPERATIONS
Summary: Key Differences
UNIT 2

Income Cash
Source Income statement Cash flow statement

Represents Flow of goods and Monetary transactions

services

Shows us Economic viability Financial viability

(is the company (does the company
profitable?) have enough to get
there?)
Origin and application of funds
UNIT 2

◼ To link the two concepts (profit and cash) there is a tool

called source and application of funds (SAF)
◼ Profit is calculated by drawing up the income statement
◼ Cash generated comes from the cash flow statement
◼ Thanks to this tool we will see where the cash movement
of a fiscal year comes from (origin) and where it has
been allocated (application)
 David Echeverry
2022

Fundamentals of finance
Last time and today's UNIT 2

preview
Last time: income vs. cash movements
• Revenue vs. collection
• Expense vs. payment
Today
• Origin and application of funds
• Cash flows: calculation
Preliminary concepts
UNIT 2
Funds generated
FG = monetary income - expenses
• Traditionally known as cash flow
• FG = net income + non-cash generating items
• Depreciation, amortization, provisions and deferrals

Funds generated by operations

FGO = revenues - operating expenses
• Excludes expenses derived from the financial structure,
extraordinary expenses or income.
Cash flow calculation: Direct method
UNIT 2
Collections less payments

Go to the cash accounting of the cash statement or

bank statement to see all incoming and outgoing
transactions.

Pro: easy to understand

Pro: Provides a breakdown of the origin of collections

and payments.

Con: requires information on all collections and

payments.
 Direct method
Income minus out-of-pocket expenses
Cash flow: Direct FUNDS GENERATED (CASH-FLOW)
method (+) Sales
UNIT
500,000 €
2
(-) Cost of sales 225,000 €
(-) Structure 125,000 €
(-) Financial expenses 5,000 €
(-) Taxes (tax = 25%) 18,750 €
INCOME STATEMENT (=) FUNDS GENERATED 126,250 €
(+) Sales 500,000 €
(-) Cost of sales 225,000 € FUNDS GENERATED BY OPERATIONS
(=) Margin 275,000 € (OPERATING CASH-FLOW)
(-) Structure 125,000 € (+) Sales 500,000 €
(=) EBITDA 150,000 € (-) Cost of sales 225,000 €
(-) Amortization 60,000 € (-) Structure 125,000 €
(-) Provisions 10,000 € (-) Operating taxes 20,000 €
(=) EBIT 80,000 € (=) FUNDS GENERATED BY
130,000 €
(-) Financial expenses 5,000 € OPERATIONS
(=) BAT 75,000 €
(-) Taxes (tax = 25%) 18,750 € Operating taxes do not take into account the financing
of the company and are calculated as follows:
(=) Net profit 56,250 €
tax rate x BAIT (or EBIT)
Financial expenses are never operating expenses

FG = FGO - GF + Tax Shield 126,250.00 €

FG = Funds generated
Funds generated by operations
GF = Financial Expense
Tax shield = % tax x GF
Cash Flow Calculation: Indirect Method
UNIT 2
Take beginning and ending balances, and then make
adjustments and eliminations to obtain the cash flow
Part of financial accounting (from income statement)
The following documents are required:
1. Beginning balance
2. Income statement for the period in question
3. Final balance
Pro: less data needed
Cons: more difficult to understand
 Indirect method
Profit plus items that have not moved funds
Cash flow: Indirect FUNDS GENERATED (CASH-FLOW)
method (+) Net Profit
UNIT 2
56,250 €
(+) Amortizations 60,000 €
(+) Provisions 10,000 €
(=) FUNDS GENERATED 126,250 €

INCOME STATEMENT
(+) Sales 500,000 €
(-) Cost of sales 225,000 € FUNDS GENERATED BY OPERATIONS
(=) Margin 275,000 € (OPERATING CASH-FLOW)
(-) Structure 125,000 € (+) EBIT 80,000 €
(=) EBITDA 150,000 € (-) Operating taxes 20,000 €
(-) Amortization 60,000 € (+) Amortizations 60,000 €
(-) Provisions 10,000 € (+) Provisions 10,000 €
(=) EBIT 80,000 € (=) FUNDS GENERATED BY
130,000 €
(-) Financial expenses 5,000 € OPERATIONS
(=) BAT 75,000 €
(-) Taxes (tax = 25%) 18,750 €
(=) Net profit 56,250 €
 So, the funds generated are cash?
Suppose we have these outstanding items
Customers 45,000 €
Inventories 30,000 €
Suppliers 50,000 €

This means that we still have €25,000 to settle

FUNDS GENERATED (CASH-FLOW)
(+) Sales 500,000 €
(-) Cost of sales 225,000 €
(-) Structure 125,000 € FUNDS GENERATED
(-) Financial expenses 5,000 € (+) FG 126,250 €
(-) Taxes (tax = 25%) 18,750 € (+/-) Settings - 25,000 €
(=) FUNDS GENERATED 126,250 € (=) GENERATED CASH (CG) 101,250 €

FUNDS GENERATED BY OPERATIONS FUNDS GENERATED BY OPERATIONS

(OPERATING CASH-FLOW) (OPERATING CASH-FLOW)
(+) FGO 130,000 €
(+) Sales 500,000 €
(+/-) Settings - 25,000 €
(-) Cost of sales 225,000 €
(=) CASH GENERATED
(-) Structure 125,000 € 105,000 €
FROM OPERATIONS (CGO)
(-) Operating taxes 20,000 €
(=) FUNDS GENERATED BY
130,000 €
OPERATIONS
Applications and sources of
funds UNIT 2

• What has been done in the company in a given

period and how has it been financed?
• Only cash movements or cashable items are shown
• Not shown:
depreciation,
provisions,
accruals,
variations in reserves
Application of funds UNIT 2

What the company has done in a given period:

investments, loan payments, dividend payments,
purchase of raw materials, etc
• Increases in assets
• Decrease in liabilities: repayment of loans, payment
of suppliers
• Negative funds generated: coverage of operating
deficits in the company's activity
Source of funds UNIT 2

How the company has obtained the necessary

resources in a given period: inventory sales, customer
collections, etc.
• Decrease in assets: sale of fixed assets, reduction of
inventories due to sale, collection from customers
• Increase in liabilities: new loans, capital increases,
longer supplier payment terms
• Positive funds generated: positive funds that finance
the applications of funds to be made
What does a source and
UNIT 2
application table tell us?
• Conduct a company diagnosis

• Explain where the benefit materializes

• Explain a potential liquidity problem

• Explain the variations of working capital

• Explain variations in funding requirements

• Show the financial structure

• Sizing the investment, financing and dividend distribution

Example: ABC company
UNIT 2

Concepts Year 1 Year 2 Year 3

Investments made every year 1,200,000 € 300,000 € 400,000 €
Divestments - € - € 300,000 €
Useful life 20 15 8
Residual value - - -
Annual amortization fee 60,000 € 20,000 € 50,000 €
Sales 1,000,000 € 1,200,000 € 1,440,000 €
Average collection period 90 120 130
Average payment period 60 65 70
Inventories (days based on cost of sale) 30 40 45
Provision objective (% of sales) 2% 2% 10%
Insolvency provision 20,000 € 24,000 € 144,000 €
Bad debt provision endowment 20,000 € 4,000 € 120,000 €

Let's draw up a table of source and application of funds

year by year to see what has happened
• See attached Excel
Today's summary and next class
UNIT 2

Today: source and application of funds

Where does cash flow come from (source)
Where it is intended for (application)
Next class: cash flow calculation
Free cash flow
Cash flow from debt
Cash flow to shareholder
 David Echeverry
2022

Fundamentals of finance
Last time and today's
UNIT 2
preview

Last time: Origin and application of funds

• Where the funds come from
• Where funds are applied
• Understand discrepancies between income and
cash
Today: cash flow calculation
• Free cash flow, cash flow to debt, cash flow to
shareholder
• Treasury flows
 Cash flow: back to basics

• Cash flow is the difference between receipts and

payments over a period of time.
• Often, cash flow is identified as:
cash = net profit + amortizations + provisions

Only applies if
• all sales have been collected
• all expenses (and costs) have been paid
• the company's investments in current and non-current
assets are not paid for.
TOPIC 2: Analysis of the Cash Flow Statement

• no financial debt is taken or repaid

3
Types of cash flows
1. Free cash flow (FCF): Free cash flow, operating
cash flow, operating cash flow, economic cash
flow.
2. Debt cash flow (DCF): derived from the financing
structure chosen to sustain the business.
3. Shareholder cash flow (SCF): what is left to the
owner(s) of the company!
FCL - FCD = FCA
Free cash flow (FCL)

• Cash generated by the company from business

operations, regardless of financing structure
• Must be positive to pay back the financial
commitments
• It must allow for shareholder remuneration, as well
as interest payments and debt amortization
Debt cash flow (DCF) - debt cash flow

• Cash flows to/from financial debt (banks)

• Includes:
- financial debt entry
- repayment of debt
- after-tax interest payment
• Includes long-term and short-term debt
Shareholder's cash flow (FCS) - equity
cash flow
• What remains to the shareholder after repayment
and remuneration of financial debt
• It can have several uses:
a) Payment of dividends
b) Capital increase
c) Share repurchase
d) Surplus cash of the company

FCS = FCL - FCD

Cash flow: direct and indirect method
Direct method
Collections less payments

Pro: easy to understand

Cons: Requires a lot of information (collections and

payments)
Indirect method
Takes beginning and ending balances, then makes
adjustments and eliminations
Pro: less information needed

Cons: a little more difficult conceptually

 FREE CASH FLOW CALCULATION - indirect method
(+) Operating profit (EBIT or BAIT) Income statement
(-) Operating taxes(note 1) Income statement
(+) Amortizations Income statement
(+) Provisions Income statement
(- / +) Increase / decrease in customers Balance sheet assets
(- / +) Increase / decrease in inventories Balance sheet assets
(- / +) Increase / decrease in operating cash Balance sheet assets
(+/-) Increase / decrease of suppliers Balance sheet liabilities
(+/-) Increase / decrease Hp and SS creditor Balance sheet liabilities
(-) Investment in non-current assets Balance sheet assets
(+) Divestment of non-current assets Balance sheet assets
(+) Increase in anticipated income Balance sheet liabilities
(-) Increase in anticipated expenses Balance sheet assets
(=) Free cash flow
Note 1: Operating taxes = BAIT x% tax rate

TOPIC 2: Analysis of the Cash Flow Statement

9
 CALCULATION OF CASH FLOW TO DEBT - direct method
(-) Entry of financial debt Balance sheet liabilities
(+) Repayment of financial debt Balance sheet liabilities
(+) Payment of interest Income statement
(-) Tax shield of interests (note 2) Income statement
(=) Cash flow to debt
note 2: tax shield = interest x% tax rate

CALCULATION OF CASH FLOW FOR SHAREHOLDERS - indirect method

(+) Net profit Income statement
(+) Amortizations Income statement
(+) Provisions Income statement
(- / +) Increase / decrease in customers Balance sheet assets
(- / +) Increase / decrease in inventories Balance sheet assets
(- / +) Increase / decrease in operating cash Balance sheet assets
(+/-) Increase / decrease of suppliers Balance sheet liabilities
(+/-) Increase / decrease Hp and SS creditor Balance sheet liabilities
(-) Investment in non-current assets Balance sheet assets
(+) Divestment of non-current assets Balance sheet assets
(+) Increase in anticipated income Balance sheet liabilities
TOPIC 2:(-) Increase
Analysis of thein anticipated
Cash expenses
Flow Statement Balance sheet assets
(+) Entry of financial debt Balance sheet liabilities
(-) Repayment of financial debt Balance sheet liabilities
(=) Cash flow for the shareholder 10
Caution

• Caution with divestitures

- net income includes the accounting gain or loss on the
sale of the non-current asset
- for the calculation of FCS we must deduct the value of
the asset (cash inflow from sale)
• Adjustments arising from cash inflows and outflows
- payment of dividends occurring during the period
- capital increases or reductions

TOPIC 2: Analysis of the Cash Flow Statement

11
Practical exercise - Laserlus company
The following data are provided:
a)Balance sheet for the years 2020 and 2021
b)Profit and loss account for the year 2021
The following information is also available:
a)The tax rate borne by the company is 25%.
b)40% dividend in March 2021
c)Current year corporate income tax is 70% in 2021
d)Half of the loan is repaid
By 2021:
1- Calculate Free Cash Flow (FCL)
TOPIC 2: Cash Flow Statement Analysis
2- Calculate the Debt Cash Flow (DCF)
3- Calculate Shareholder Cash Flow (FCS) 12
How much has been spent and earned by the
company in a given period?

Statement of treasury flows

• Mandatory after approval of the new PGC
• It is part of the annual accounts
• Origin and use of monetary assets representative of cash
and cash equivalents

1. Operating activities

Cash flow
2. Investment activities

3. Financing activities
TOPIC 2: Analysis of the Cash Flow Statement
 Balance sheet UNIT 1

Accounting perspective Financial perspective

NON-OPERATING
ASSETS

EQUITY EQUITY

ASSETS
FINANCIAL
DEBT
BUSINESS
LIABILITIES

§ Double-counting: Each change in the balance sheet has a corresponding effect

§ The financial perspective explains how financiers view the company
Cash flow statement
UNIT 2

CASH FROM OPERATIONS (BUSINESS)

+NET INCOME
- NON-CASH INCOME
+ CASH NOT DERIVED FROM INCOME

CASH FROM INVESTMENT (BUSINESS)

CASH FROM FINANCING

Operating activities
A) CASH FLOW FROM OPERATING ACTIVITIES Grades Year n Year n-1
1. Profit for the year before taxes
2. Result adjustments
a) Amortization of fixed assets (+)
b) Valuation adjustments for impairment (+/-)
c) Variations in provisions (+)
d) Imputation of subsidies (-)
e) Results from disposals and disposals of fixed assets (+/-) Pre-tax figure taken as starting point
f) Results from disposals and disposals of instruments
financial (+/-)
g) Financial income (-)
h) Financial expenses (+) a) b) c) d) i) j) and k) eliminate
i) Exchange differences (+/-)
j) Variation in fair value of financial instruments (+/-)
items that do not involve a
k) Other income and expenses (- / +) change in cash
3. Changes in working capital
a) Inventories (+/-)
b) Debtors and other accounts receivable (+/-)
c) Other current assets (+/-) e) f) g) and h) eliminate investment
d) Creditors and other accounts payable (+/-)
e) Other current liabilities (+/-)
or financing items
f) Other non-current assets and liabilities
4. Other cash flows from operating activities
a) Payment of interest (-)
b) Collection of dividends (+) Corporate income tax (profit)
c) Interest collection (+)
d) Payments (collections) for income tax (- / +)
5. Cash
TOPICflows from operating
2: Analysis activities
of the Cash Flow Statement
(+/- 1 +/- 2 +/- 3 +/- 4)

Note: other cash flows included (debatable, they belong in the

financial structure!)
Investment activities
CASH FLOWS FROM INVESTING ACTIVITIES
Payments originating from the acquisition of non-current assets such as fixed assets are included.
intangibles, materials, real estate investments and financial investments, as well as the proceeds from
of their sale or amortization at maturity (in the case of investments held to maturity)
Direct method

B) CASH FLOWS FROM INVESTMENT ACTIVITIES Notes Year n Year n-1

6. Payments for investments (-)
a) Group companies and associates
b) Intangible assets
c) Property, plant and equipment
d) Real estate investments
e) Other financial assets
f) Non-current assets held for sale
g) Other assets
7. Receipts for divestments (+)
a) Group companies and associates
b) Intangible assets
c) Property, plant and equipment
d) Real estate investments
e) Other financial assets
f) Non-current assets held for sale
g) Other assets
8. Cash flows from investing activities (7-6)

Includes
- TOPIC
payments for acquisition of non-current assets
2: Cash Flow Statement Analysis

- proceeds from their disposal or redemption at maturity

17
Financing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Direct method

C) CASH FLOWS FROM FINANCING ACTIVITIES Notes Year n Year n-1

9. Collections and payments for equity instruments
a) Issuance of equity instruments
b) Amortization of equity instruments
c) Acquisition of own equity instruments
d) Disposal of own equity instruments
e) Grants, donations and bequests received
10. Collections and payments for financial liability instruments
a) Issuance:
1. Obligations and similar securities (+)
2. Debts with credit institutions (+)
3. Debts with group companies and associates (+)
4. Others (+)
b) Return and amortization of:
1. Obligations and similar securities (-)
2. Debts with credit institutions (-)
3. Debts with group companies and associates (-)
4. Others (-)
11. Payments for dividends and remuneration of other instruments
heritage
a) Dividends (-)
b) Remuneration of other equity instruments (-)
12. Cash flows from financing activities
(+/- 9 +/- 10 -11)

- Company-issued securities or loans

TOPIC 2: Analysis of the Cash Flow Statement

- Amortization or repayment of debt

- Dividend payments 18
Cash flow statement: Amazon example

TOPIC 2: Analysis of the Cash Flow Statement

Back to the Laserlus example

For the year 2021, calculate cash flows for the following
activities
1- Operation
2- Investment
3- Financing
Verify that the ending cash balance for the year 2021 is
the sum of the cash balance for the year 2020 plus the
sum of the cash flows.

TOPIC 2: Cash Flow Statement Analysis

20
 Laserlus: operating activities

2020 2021 2020 2021

GROSS FIXED ASSETS 150,000 € 150,000 € SOCIAL CAPITAL 120,000 € 120,000 €
AAIM 30,000 € 35,000 € RESERVES 18,000 € 21,600 €
NON-CURRENT ASSETS 120,000 € 115,000 € RESULT 6,000 € 7,500 €
INVENTORY 18,500 € 5,000 € NET WORTH 144,000 € 149,100 €
CUSTOMERS 38,000 € 20,000 € NON-CURRENT LIABILITIES - € - €
TREASURY 24,900 € 33,975 € SUPPLIERS 15,000 € 4,125 €
CURRENT ACTIVE 81,400 € 58,975 € CREDITOR PUBLIC TREASURY 2,400 € 750 €
DEBTS 40,000 € 20,000 €
CURRENT LIABILITIES 57,400 € 24,875 €
TOTAL ASSETS 201,400 € 173,975 € TOTAL EQUITY + LIABILITIES 201,400 € 173,975 €

Initial balance 24,900.00 €

(-) Var Stocks = -(5.000 - 18.500)
OPERATING ASSET CASH FLOWS 2021
BAT 10,000.00 €
Result adjustments 5,500.00 € (-) Var Customers = -(20,000 - 38,000)
Amort 5,000.00 €
Financial expenses 500.00 € (+) Var Suppliers = (4,125 - 15,000)
Current cap changes 20,625.00 €
Stocks 13,500.00 €
Customers 18,000.00 €
Providers - 10,875.00 €
Other cash flows .. - 4,650.00 €
Interest payments - 500.00 €
IS payments - 4,150.00 € Payment of taxes 2021
Asset cash flow exploded 31,475.00 €
CASH FLOW ACTIVITIES INVESTMENT IS year 2020 2.400.-€
Investment payments - €
Immobilized - € Part IS 2021*. 1.750.-€
Cash flow activities inv - €
FINANCING ACTIVITY FLOW Total 4.150.-€
Collections and payments for passive instruments
- 20,000.00 €
Capital contribution - €
Financing contracting - €
TOPIC 2: Analysis of the Cash Flow Statement
Loan repayment - 20,000.00 €
Dividend payment - 2,400.00 €
Financial asset flow - 22,400.00 €
Cash movements 9,075.00 €
Final balance 33,975.00 €

* If we look at the P&L account we will see that the tax payable is 2,500, however the HP account payable for IS at the end of the year is 750.-€, which
means that during the year we have paid the difference, 70% of the IS as the statement says.
21
 Laserlus: investment activities

FLUJOS DE EFECTIVO DE LAS ACTIVIDADES DE INVERSIÓN

Método directo
2020 2021 2020 2021
INMOVILIZADO BRUTO 150.000,00 € 150.000,00 € CAPITAL SOCIAL 120.000,00 € 120.000,00 € B) FLUJOS DE EFECTIVO DE LAS ACTIVIDADES DE INVERSIÓN Notas Año n Año n-1
6. Pagos por inversiones (-)
A.A.I.M. 30.000,00 € 35.000,00 € RESERVAS 18.000,00 € 21.600,00 € a) Empresas del grupo y asociadas
ACTIVO NO CORRIENTE 120.000,00 € 115.000,00 € RESULTADO 6.000,00 € 7.500,00 € b) Inmovilizado intangible
c) Inmovilizado material
STOCK MATERIAS PRIMAS 18.500,00 € 5.000,00 € PATRIMONIO NETO 144.000,00 € 149.100,00 € d) Inversiones inmobiliarias
CLIENTES 38.000,00 € 20.000,00 € PASIVO NO CORRIENTE - € - € e) Otros activos financieros
f) Activos no corrientes mantenidos para venta
TESORERÍA 24.900,00 € 33.975,00 € PROVEEDORES 15.000,00 € 4.125,00 € g) Otros activos
7. Cobros por desinversiones (+)
ACTIVO CORRIENTE 81.400,00 € 58.975,00 € H.P. ACREEDORA 2.400,00 € 750,00 € a) Empresas del grupo y asociadas
DEUDAS 40.000,00 € 20.000,00 € b) Inmovilizado intangible
c) Inmovilizado material
PASIVO CORRIENTE 57.400,00 € 24.875,00 € d) Inversiones inmobiliarias
TOTAL ACTIVO 201.400,00 € 173.975,00 € TOTAL PATRIMONIO + PASIVO 201.400,00 € 173.975,00 € e) Otros activos financieros
f) Activos no corrientes mantenidos para venta
g) Otros activos
8. Flujos de efectivo de las actividades de inversión (7-6)

FLUJO EFECTIVO ACTIVIDADES INVERSIÓN

Pagos por inversiones - €
Inmovilizado - €
Flujo de efectivo actividades inv - €

TOPIC 2: Analysis of the Cash Flow Statement

22
 Laserlus: financing activities

FLUJOS DE EFECTIVO DE LAS ACTIVIDADES DE FINANCIACIÓN

Método directo

C) FLUJOS DE EFECTIVO DE LAS ACTIVIDADES DE FINANCIACIÓN Notas Año n Año n-1

9. Cobros y pagos por instrumentos de patrimonio
a) Emisión de instrumentos de patrimonio
b) Amortización de instrumentos de patrimonio
2020 2021 2020 2021 c) Adquisición de instrumentos de patrimonio propio
d) Enajenación de instrumentos de patrimonio propio
INMOVILIZADO BRUTO 150.000,00 € 150.000,00 € CAPITAL SOCIAL 120.000,00 € 120.000,00 € e) Subvenciones, donaciones y legados recibidos
10. Cobros y pagos por instrumentos de pasivo financiero
A.A.I.M. 30.000,00 € 35.000,00 € RESERVAS 18.000,00 € 21.600,00 € a) Emisión:
1. Obligaciones y valores similares (+)
ACTIVO NO CORRIENTE 120.000,00 € 115.000,00 € RESULTADO 6.000,00 € 7.500,00 € 2. Deudas con entidades de crédito (+)
3. Deudas con empresas del grupo y asociadas (+)

STOCK MATERIAS PRIMAS 18.500,00 € 5.000,00 € PATRIMONIO NETO 144.000,00 € 149.100,00 € 4. Otras (+)
b) Devolución y amortización de:

CLIENTES 38.000,00 € 20.000,00 € PASIVO NO CORRIENTE - € - € 1. Obligaciones y valores similares (-)

2. Deudas con entidades de crédito (-)
3. Deudas con empresas del grupo y asociadas (-)
TESORERÍA 24.900,00 € 33.975,00 € PROVEEDORES 15.000,00 € 4.125,00 € 4. Otras (-)
11. Pagos por dividendos y remuneraciones de otros instrumentos
ACTIVO CORRIENTE 81.400,00 € 58.975,00 € H.P. ACREEDORA 2.400,00 € 750,00 € de patrimonio
a) Dividendos (-)
DEUDAS 40.000,00 € 20.000,00 € b) Remuneración otros instrumentos de patrimonio (-)
12. Flujos de efectivo de las actividades de financiación
PASIVO CORRIENTE 57.400,00 € 24.875,00 € (+/- 9 +/- 10 -11)

TOTAL ACTIVO 201.400,00 € 173.975,00 € TOTAL PATRIMONIO + PASIVO 201.400,00 € 173.975,00 €

Statement of Cash Flows 2021 Amount €

a) Cash flow from operating activities 31.475.-€

Operating
b) Active cash flow. Investment 0.-€
FLUJO ACTIV FINANCIACIÓN
Cobros y pagos por instrum pasivo - 20.000,00 €
c) Active cash flow. Financing -22.400.-€
Aportación capital - €
Contratación financiación - €
Devolución préstamo - 20.000,00 €
Cash flow for the year 2021 9.075.-€
Pago dividendos - 2.400,00 €
Flujo activ financ - 22.400,00 € EFE Summary

In March 2021, we paid a dividend of 40% of Beginning cash balance year 2021 24.900.-€
the previous year's profit.
Cash flows year 2021 9.075.-€
Closing cash balance year 2021 33.975.-€

TOPIC 2: Analysis of the Cash Flow Statement

23
Today's summary and next class
UNIT 2

Today: cash flow calculation

• Free cash flow, cash flow to debt, cash flow to
shareholder
• Cash flows
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