Chapter 4 Cashflow and financial

planning
↓ -
cash flow cash
↓
planning Profit planning
Statement Cash budget perform Jucome statement

· Cash flow Statement : is a financial statement that show cash inflows (sources of cast) and

cash outflows (uses of cash) from three business activities which are

operating ,
investing and
financing activities

-
In order to
prepare cash flow statement ,
we need :

1) One income statement (year 2023)

2) Two balance sheets (for the 2022 and 2023)

years

-
Methods used to
prepare the cash flow statement

1) Indirect method

2) Direct method

Cash inflows (Sources of cash) Cash outflows (uses of cash)

Net Income Net loss

depreciation and any non cash changes

55
%
cash Sl
out
flow

Decrease in assets (i) Increase in assets (l)

increase in Liabilities (iii) decrease in Liabilities (as)
Sales of Stocks (
,'I e).
Repurchase of stacks (Isligos) (Treasury stock)

Cash flow related to Business Activities :

cash flow from Cash flow related the production

operating activities : to

and sale of the firm's product which include :

 Net Income + Depreciation

change in current assets

excluding the
change in cash and the
change in marketable securities.

and the
change in current liabilities
excluding the
change in
intrest-bearing short dents
charge in the Notes
payable

cash flow from

investing activities : Cash flow related to the sale and purchase of fixed assets which is

represented by :

change in
gross fixed assets
.

Cash flow Cash which

from
financing activities
: flow related to debt and
equity financing is represented by :

change in
intrest-bearing short-term debts and
change in notes .
payable

change in
long-term debts.

Preferred Stock
change in a par

change in Common stock

Apar

change in additional paid in excess

par

Dividends paid

Indirect method can be used to

prepare the cash flow statement as follows :

Xyz Company
cash flow statement

For the year ended Dec 31 ,

2023

Net Income

+ Depreciation (non cash expense)

->
Increase in Accounts receivable

+ Decrease in Accounts receivable

Increase
- in
inventory

+ Decrease in
inventory
+ Increase in Accounts payable
>
- Decrease in Accounts payable
+ Increase in Accruals (Accrued liabilites)
- Decrease in Accusals (Accrued liabilities)
Cash flow provided by (used by) operating an
activities - " i
(CFO
&
is
S9 .
 Cash flow from activities
investing
:

Increase in fixed assets

-

gross
Decrease in fixed assets
+ gross

Cash flow provided by (used by

linesting activities (CF)
&
is
& Su
Is

Cash flow from financing activities :

Notes
+ increase
in
payable
-
Decrease in Notes payable

Shortsterm bank (Short-term

+ increase in note
interest-bearing debt)
-
Decrease in short-term bank note (Short-term interst-bearing debe)
debe
- increase in
long-term
-
Decrease in
long-term debt
+ Increase in preferred stock
a par

-> Decrease in preferred stock of per

+ Increase in common stock of par

Decrease in a
stock
- common
par
+ Increase in additional paid in excess of par

>
- Decrease in additional paid in excess of par

-
Dividends paid

Cash flow provided by (Used by) financing activities (CFF) .

Net cash flow - CFO + (F5 + CFF

Net cash flow =
change in cash + change in marketable securities
 Xyz Company
Statement of retained
earnings
For the year ended DecB 1 ,
2023

Retained balance (2022)

earnings beginning
↑
Net Income (2023)

-
Dividends (preferred and common 2023)

Retained balance (2023)

earnings ending
 Baker Corporation
cash flow statement

For the year ended Dec 31 , 2015

Net Income $ 1 %o

$100
↑ Depreciation
↓
Ddecrease in accounts receivable $100

- Decrease in inventories $300

increase Accounts $
- in
payable 200

- Decrease in Accruals $ 100

cash flow provided by operating

activities $780

Cash flow from

investing activities :

gross fixed
-
increase in assets $300

+
Cash flow used by investing activities ($300)

cash flow from financing activities :

- Decrease in Notes payable $100

+ increase in longterm debt $200

-
Devidents paid $ Go

cash flow provided by financing activites $20

Net Cashflow = Cf0 + (f5 + Cff = 780 -
300 + 20 = $500

Stake
Baller Corporation

more of Retained morning s lood

for the ended Dec 31 201s

year ,

Retained
earnings beginning balance $500 688-
Goo
-

- Net Sucone & 180

X
-
Deirdends
Retained earnings ending balance $) Goo
04 -
6

197

$1600
 problem 4-6
page 196 :

Depreciation Expense $600

Prepare cash flow statement for the year ended Dec 31 2013 the indirect method
a .

, ,
Using
Summer BreezeCorporation

Cash flow statement

forthe
year ended Dee 31 ,
201s

New Income $1600

+ depreciation expense $1600

- Increase in Account Receivable ↓) 200

-
Increase in
inventory $100

- increase in account
payable $100

>
- decrease in Accruals $ 100

operating
Cash flow provided by activities $2900

Cash flow from activities

investing
:

>
- increase in gross fixed assets 5) 1400

Cash flow used by investing activities ($100)

cash flow from financing activities :

↓ increase in notes
payable $ 600

-
Dividends paid $ 1000

Cash flow used by financing Activites (-4o0$)

Net cashflow = (FA + CF5 + CFF = 2900 - 100 -
400 = 1100 s
·

Summer Breeze Corporation

Retained
statement of earnings

for the
year
ended Dec 31 , 201s X
Retained earnings beginning balance $ 3400
5) 100
3400 +
1600 -

I
&X
X =

-
400G
I
4068
+ Net Income -
4006

W
X
-mined
ending balance $ X 1000
Retained earnings $4000 =
 MACRS Method :

According to MACRS Depreciation expense - MACRS rate" installed cost of the assets

Example page 166

installed cost of the machine = $40 , 000

period 5 years
Recovery =

Year Depreciation expense Accumulated depreciation

3
. 40, 0008 20 % = $8 , 000 $) 8000

2 40, 000432 % = $12 , 800 $ 20 , 800

3 40 , 000419 % = $7 , 600 5) 28 , 400

4 40 , 0008 12 % = $7 , 800 $33 ,
200

S 40 , 000
*
12 % $4 800
, $38 000
= ,

6 40, 0008 S % o = $2 , 000 $40 , 000

The financial
planning process

Cash flow and Financial Planning

Cash planning Profit

planning
~ ~

Cash Budget Proforma Income Statement

·
Cash Budget >
-
Show estimated in flows and estimated cash outflow

* If estimated Cash inflows) estimated cast outflows >

-
surplus (that needs to be invested

· If estimated Cash inflows <estimated cash inflows > deficit

-

(that needs to be financed

shortage
Example page
177
 A schedule of projected cash in flows (000)

August September October November Dec

Sales $) 100 $200 $) 400 # 300 $200

& 20 % x
100)

Cash 20 $40 $ 80 $ 60 $40

Sales

Collection of $ So $) 100 $200 $ 1So

Account Recivabe d
"To fo joist
↳ lagged
Ayust
-
s January budget
,
90
Sep
⑧

one month 50 %

lagged two Month Bo % $ 30 $60 $ 120

other Cash Receipts $30

Total Cash receipts $210 $ 320$340

A schedule of
projected cash outflows (000)

August Dec

&
Sept Oct Now

a
&
- -

purchases 70 (70 % 00) $ 14 $ 250 $ 210 $140

Cash purchases 10 % 7 14 28 21 14

Payment of AlP.
(70 % 870)
49 98 196
lagged one month Fo % 147

lagged two month 20 % 14 28 56

(20% 870)

rent S Si S S S

wages salaries
48 38 28

fax payment 25

fixed 130
asset out
by
interest 10
payment

Cash Devdeads payment 20 &

20
principal payments

$ 213 $418 $ 30S

 Cash Budget (000)

minimum cash Balance =

$25

end of
Sept cash balance = $So

Oct Nov Dec

total Cash
Receipt $210 $320 $ 340

less total cash outflows 213 418 30S

Net cash flor 3 98 35

Add
1 :
beg cash balance So 5)
947
- -
.

Ending balance 47 ($S1) ($ 16)

less : minimum cash 25 25 25

balance
#

excess
-22 (76) ($41)
cash -
↓
MIS

shortage requires financing

 A schedule of projected cash inflows (receipt) ($000)
& O &

&
July

sign
August Sept Oct Nou

$350 $380 $390 $385 $418 $ 429

inital ash
·
=Piso 114 117 11S S . 125 4 .
128 7 .

2350990 % )
227 S .
247 253 S .
250 25 .
. 71 7
2 .

Account Recivale
Lagged one month6S %

eash -
minimum
babree = $8
&

other cash receipt 3 3 3 3 3 3

total cash receipt $) 372 $) 378 . 65 $43

4 .

A schedule of projected cash disbursements (out flows

August Sept oct Nov

purchases $120 $150 $ 120 $ IIS

% So2 , 20)

cash purchases Soy $60 $75 $ Go 5) S7 .

S
(50% 9429)

payment of Accounts payate $6o 7S Go

lagged month 60 %
one

rent 3 3 .
3 S .

Salaries 12 % of the
and
Wages

previous month's sales 46 8 . 46 2 . So .

16

Cash Dividends 4 ) .

4 7
Loan
repayment (principle and intrest) .

New equipment 8 S .

taxes 8 25 .

total cash disbursements (outflows) 186 . 4 189 Y .

187 91 .

Enselries
&
Sept

- 12 %+ 320 = 46 2 .

out
wages an salaries =
12 %* 385 = 46 2 .

NOV mages and salaries : 12 %* 418 = So 16

.
 Cash budget (ood
>
- minimum cash balance = $8

sending of Sept balance--$Iso

Now
Sept act

totall cash receipt 372 378 65 .

403 4 .

less total cash disbunsment 186 4.

189 Y .
187 91 .

&

Net cash flow 185 . 6 189 25 . 215 49 .

Add beg cabin balance I So 335 6 . S24 25

.

cash balance
- -
ending 335 6 .
524 2S . 740 .
34

less minimum Cash # 8 $) % $8

MIS 327 6 . S16 83

.
732 34
.
 Pro forma Income statement : forecasted income statement >
-
it shows estimated

revenues and estimated expenses.

Methods used to
prepare proforma income statement :

1) percent of sales method

2) fixed and variable method

.

Percent of sales method

1) Estimate the revenues (Sales)

(excluding taxes) Current

(
2) Estimated expense 2024 =
expense 2023 a estimate sales 2024

Sales 2023

Example page 185 :

 Vectra
Manufacturing
Pro forma income statement

for the
year ended December 31 , 2016

Sales Revenue $ 135 , 000

Cost of
·
good sold 5 108 ,
000

Gross profit 5) 27 , 000

operating Expense 5) 13 , 500

profit 5) 13 Soo
operating ,

-
Interest expense $ 1 ,
350

Earnings before taxes $ 12 ,

/So

-
taxes (15 % ) $ 1 , 823

Net profit after tax $ 10 , 327

Common
- dividends & 4 , 000

Retained $ 6 , 327
Earnings

& percent of sales method assume all expenses are variable . In

expense Reality
they are not

-
solizol(000a
operating
·

S excence 2016 =
Cost of

10
get

Bo
interest
( J·
cost of

-x

2016
good
% 80
Gold

Jus
&I
 Fixed and variable method
1) Estimate the Revenues (Sales)
year 2024
2) Decompose the current expense into fixed and variable .

3) Estimated variable expense 2024 = variable expense a Estimated sales 2024

2023

Sales 2023

4) Estimated Expense 2024 = fixed expense

+ estimated variable expense

5) Note that taxes are calculated as

percentage of
earnings before tax
.

Vectra
Manufacturing

&
Pro forma income statement cost of good sold (variable) 2016
for the
year ended December 31 , 2016 = Y
0 000
135 , 000 = 54 , 000

Sales Revenue
$ 135 000
100 , 000
,

Cost of
·
good sold fixed $40, 000
operating expense
(variable) 2016 =

cost of good sold Variable $54 67

000
13 , 000 =
,

Gross profit $41, 000

-

Expense
operating
fixed $ S, 00d

variable $6 750 ,

operating profit (EBIT) $29 , 250

-
Entrest Expense (all fited $ 1 , 000 [ I =5 jnaj x)

Earnings before
dates $28 , 250

-
taxes (13 %* 28 , 250) 5) Y , 238

Net Income /Net $24 , 012

profit after tex
Common
-
Dividends $ 4 , 000

Retainder $20 012

earrys ,
 as Percent of sales method :

Bells Manufacturing

Sales revenue $2 , 250 , 000

>
- cost of goods sold $ 1, 373, 000

gross profit ↑ 873 ,

000

$ S62
operating Expenses
-
, Soo

$312
operating profit ,
500

-
Interest expense $ 24 ,
500

EBT $288 ,
000

>
- taxes (40 % 4238
, 000) $11S , 200

Net profit after tax $172 , 800

>
- Cash Dividends 5) 85 , 000
8 x6 ! 4.58
552-0
retaind
earnings $87 800 ,

G st of
good sold 2016-
1 , 3750
/ /100 1000
2 ,
250 , 000 =

Gold = 1 $562 500

·
perating Expense 10
000 , + 21230, 000 =
,

1 , 800 000
,
b) Bells Manufacturing
pro for Income statement

for the year eaded Dec

, 31 ,
2016

Sales Revome $ 2 , 250 , 000

-cost of good sold fixed $7501 000

Variable 937, 300

Gross profit S62 , Soo

good sold
10
cost of 2016 a 2 250, 0 0
,000
,