FSI-Chapter 2 - Horizontal Analysis

DEPARTMENT OF
COMMERCE, MAHE,
MANIPAL
Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email: doc.office@manipal.edu
Horizontal
HorizontalAnalysis
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percentage
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anddecreases
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Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
Horizontal analysis
Horizontal analysis is where changes in various

items within the financial statements are compared
from year to year.
For example, in the Income Statement, the change in sales or
revenues from year 1 to year 2 is compared.
Amounts for comparative years are expressed as a

percentage of the base year amount
Horizontal Analysis Example
Calculating Change in Dollar Amounts

Dollar Current Year Base Year
Change = Figure – Figure
How to calculate change in %
▪ Change in % =change in amount ÷ Base year

amount×100
Year-to-Year Change Analysis
▪ Use both absolute and percentages

▪ Guidelines:/Limitation
▫ A meaningful percent change cannot be
calculated when one number is positive and the
other number is negative
▫ A percent change cannot be calculated when
there is no figure for the base year.
▫ When an item has value in the base year and
none in the next period, the decrease is 100%
Complication in Horizontal Analysis
Items $ Base Year Current Year Amount Percentage
Net Income (4500) 1500 6000 -

(Loss)
Tax 2000 (1000) (3000) -
Expenses
Cash 10 2010 2000 20000%
Account - 8000 8000 -
Payable
Account 10000 - (10000) (100%)
Receivable
1) Prepare a multi-step income statement for Kumar swami
co ltd from the following single step income statement
Net sales 54,99,000
Interest income 39,000
55,38,000

Cost and expenses:
Cost of goods sold 32,16,000
General and administrative expenses 5,25,000
Selling expenses 8,37,000
Depreciation 42,000
Interest expenses 48,000
Income tax 3,48,000
50,16,000
Net income 5,22,000
Lincoln Company Comparative Income Statement
December 31, 2016 and 2015
2016 2015 Amount %

Sales $1,530,500 $1,234,000 $296,500 24.0%
Sales returns 32,500 34,000 (1,500) (4.4%)
Net sales $1,498,000 $1,200,000 $298,000 24.8%
Cost of goods sold 1,043,000 820,000 223,000 27.2%
Gross profit $ 455,000 $ 380,000 $ 75,000 19.7%
Selling expenses $ 191,000 $ 147,000 $ 44,000 29.9%
Administrative expenses 104,000 97,400 6,600 6.8%
Total operating expenses $ 295,000 $ 244,400 $ 50,600 20.7%
Operating income $ 160,000 $ 135,600 $ 24,400 18.0%
Other income 8,500 11,000 (2,500) (22.7%)
$ 168,500 $ 146,600 $ 21,900 14.9%
Other expense 6,000 12,000 (6,000) (50.0%)
Income before income tax $ 162,500 $ 134,600 $ 27,900 20.7%
Income tax 71,500 58,100 13,400 23.1%
Net income $ 91,000 $ 76,500 $ 14,500 19.0%
2) The following is the Income Statement of Sunshine Ltd for
2015 and 2016. You are required to prepare a Horizontal
Comparative analysis and evaluate the operating position of
the Company.
2016 (In US $) 2015 (In US $)

Details
Sales 12238 11387
5192
(-) Cost of Goods Sold (COGS) 5536
Gross Profit 6702 6195
Other Expenses 186 69
3921
Selling, General & Admin Expenses 4355
Operating Income 2161 2215
Interest expenses 159 136
Profit before Income Tax 2002 2079
Tax 648 728
Net Income 1354 1351
4) Income statement of PQR ltd for the ended 31 December 2013 to
2017 are given. Examine trend of the business activities of the
company on the basis of horizontal common size data of the
statement over the years.
For the years ended 31 Dec (lakh)
2013 2014 2015 2016 2017
Total Sales 2002 1990 2220 2701 3240
Cost Of Sales 460 358 377 432 551
Gross Profit 1542 1632 1843 2269 2689
Selling and 701 697 821 1026 1166
Administrative
Expenses
Research and 320 358 400 513 617
Development
Expenses
Other Deduction 40 40 44 136 32
(Income ) Net
Operating 481 537 578 594 874
Income
Interest Expenses 21 20 10 10 12
EBT 460 517 568 584 862
Provision for Tax 160 159 168 189 251
Income From 300 358 400 395 611
Continuing
Operations
6) From the condensed balance sheet as on 31st Dec for the year 2012 to 2017 of
Moonlight Corporation, analyse the trend of the financial position of the company analyze
the trend of the business activities of the company through Horizontal Common size analysis
2012 2013 2014 2015 2016 2017
Assets:
Current Assets
Cash 36 50 66 38 34 38
Receivables 130 134 144 270 320 340
Inventories 122 146 170 242 308 366
Total Current Asset 288 330 380 550 662 744
Land, Property Equipment 304 310 312 620 650 600
Total Assets 592 640 692 1170 1312 1344
Liability & Owners Equity
Current Liability 82 86 104 306 390 440
Long term debt 60 60 60 260 260 320
Total liabilities 142 146 164 566 650 760
Capital stock 220 220 220 420 500 500
Retained earnings 230 274 308 184 162 84
Total owners’ equity 450 494 528 604 662 584
Total (liabilities+ Owners’ 592 640 692 1170 1312 1344
equity)
Horizontal Income Statement – Q1
(Assignment)
2016 (In US 2015 (In US
Details $) $)
Sales 30,00,000 28,00,000
(-) Cost of Goods Sold
20,00,000
(COGS) 21,00,000
Gross Profit 900,000 800,000
General Expenses 180,000 120,000
Selling Expenses 220,000 230,000
Total Operating Expenses 400,000 350,000
Operating Income 500,000 450,000
Interest expenses 50,000 50,000
Profit before Income Tax 450,000 400,000
Income Tax 125,000 100,000
Net Income 325,000 300,000
From the above details prepare comparative horizontal analysis and

interpret
Vertical
VerticalAnalysis
Analysis
Vertical
Verticalanalysis
analysis isisaamethod
method
of
of financial
financialstatement
statement analysis
analysis
in
inwhich
whicheach
eachline
lineitem
itemisis
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listedasasaapercentage
percentageof of aa
base
base figure
figurewithin
within the
the
statement
statement
line items on an income statement can be stated as a
percentage of gross sales, while line items on a
balance sheet can be stated as a percentage of total
assets or liabilities
Meaning
Vertical analysis is a method of financial statement analysis in

which each line item is listed as a percentage of a base
figure within the statement.
Vertical analysis involves finding out the relationship

between two items in respect of the same company
and in same year. It involves preparation of
Common-size Statement.
Vertical analysis
▪ On the income statement, each item is expressed as

a percentage of net sales.Total Assets/ Total
Liabilities
▪ Common-size statements are used to compare one
company to other companies, and to the industry
average, and earlier years
▪ compares each item in a financial statement to a
base number set to 100%. eg.: Sales in Income
statement/total assets/total liabilities
▪ proportion contribution of the concerned expenses to
the sales.
Purpose of Vertical Analysis
▪ To gain insight into the relative importance or

magnitude of various items on the financial
statements
▪ Vertical analysis is applicable for internal
performance review as well as for comparison to
peers and bench-marking
▪ Comparisons allows management and accounting
staff at the company to isolate the reasons and take
action to fix the problem
Basis Vertical Analysis Horizontal Analysis
Nature Comparison of items of Comparison of items of
financial statements to the financial statements of one
common item of same period or periods to the
accounting period corresponding items of
base accounting period
Expression of change Change in items is Change in items is
expressed either in expressed in absolute terms
percentage or in ratio or in percentage or in both
Benefits It helps in predicting or It indicates growth or
determining the future decline of the item.
relative proportion of an
item to the common item.
Purpose Determine proportion of Determine change in an
the item to the common item during an accounting
item in same accounting period
period
▪ For example, suppose XYZ Corporation has gross sales of $5 million
and Cost of Goods Sold of $1 million and general and administrative
expenses of $2 million and a 25% tax rate, its income statement will
look like this if vertical analysis is used:
▪ Sales 5,000,000 100%
▪ Cost of goods sold 1,000,000 20%
▪ Gross profit 4,000,000 80%
▪ General and Administrative Expenses 2,000,000 40%
▪ Operating Income 2,000,000 40%
▪ Taxes (%25) 500,000 10%
▪ Net income 1,500,000 30%
Vertical Analysis Example
Sample Company
Balance Sheet (Assets)
At December 31, 1999 and 1998
% of Total Assets
1999 1998 1999 1998
Cash $ 82,000 $ 30,000 17% 8%
Accts. Rec. 120,000 100,000 25% 26%
Inventory 87,000 82,000 18% 21%
Land 101,000 90,000 21% 23%
Equipment 110,000 100,000 23% 26%
Accum. Depr. (17,000) (15,000) -4% -4%
Total $ 483,000 $ 387,000 100% 100%
3) An Extract from the income statement of Star Ltd is given below.
You are required to discuss the implications of the profitability
position of the company by computing necessary measures of profit
through Vertical common size income statement analysis.
▪ Income statements
▪ For the year ended 31 December
Details 2012 2011 2010

Net Sales 1652000 1365000 840000
Cost of goods sold 1302000 1050000 595000
Gross Profit 350000 315000 245000
Operating Expenses 154000 126000 77000
Operating Profit 196000 189000 168000
Income Tax 84000 80500 73500
Net Income 112000 108500 94500
▪ 5) From the following profit and loss account and the balance sheet of Swadeshi Ltd. For the
year ended 31st December, 2010 and 2011, you are required to prepare
A common size comparative Balance Sheet and vertical common size balance sheet
Liabilities 2010 2011 Assets 2010 2011
Bills Payable 50 75 Cash 100 140
Sundry Creditors 150 200 Debtors 200 300
Tax Payable 100 150 Stock 200 300
6% Debentures 100 150 Land 100 100
6% Preference Capital 300 300 Building 300 270
Equity Capital 400 400 Plant 300 270
Reserves 200 245 Furniture 100 140
1,300 1,520 1,300 1,520
7) Income statement of PQR ltd for the ended 31 December 2013 to
2017 are given. Examine trend of the business activities of the
company on the basis of vertical and horizontal trend analysis of the
statement over the years.
For the years ended 31 Dec (Crores)
2013 2014 2015 2016 2017
Total Sales 2002 1990 2220 2701 3240
Cost Of Sales 460 358 377 432 551
Gross Profit 1542 1632 1843 2269 2689
Selling and Administrative Expenses 701 697 821 1026 1166
Research and Development Expenses 320 358 400 513 617
Other Deduction (Income ) Net 40 40 44 136 32
Operating Income 481 537 578 594 874

Interest Expenses 21 20 10 10 12
EBT 460 517 568 584 862
Provision for Tax 160 159 168 189 251
Income From Continuing Operations 300 358 400 395 611
Statement of changes in equity
A Statement of changes in equity and

similarly the statement of changes in
owner's equity for a sole trader,
statement of changes in partners'
equity for a partnership,
statement of changes in Shareholders'
equity for a Company or statement of
changes in Taxpayers'
equity for Government financial statements is
Changes in Equity
The statement explains the changes in a

company's Share Capital, accumulated
reserves and retained earnings over the
reporting period. It breaks down changes in
the owners' interest in the organization,
and in the application of retained profit or
surplus from one accounting period to the
next.
▪ Revaluation reserve is an accounting term used when a company
creates a line item on its balance sheet for the purpose of
maintaining a reserve account tied to certain assets.
▪ Authorised capital is the maximum amount of share capital that the
company is authorized by its constitutional documents to issue to
shareholders.
▪ Redeemable shares are shares that a company has agreed it will, or
may, redeem (in other words buy back) at some future date.
▪ Comprehensive income is the variation in a company's net assets
from non-owner sources during a specific period. It includes net
income and unrealized income, such as unrealized gains or losses
Line items typically include profits or losses from
operations, dividends paid, issue or redemption of
shares, revaluation reserve and any other items
charged or credited to accumulated other
comprehensive income
▪ Issue of share at par

▪ Issue of share at premium
▪ Issue of share at discount
CONTENTS OF SOCIE
▪ the statement of changes in equity should

show all changes in equity including:
▪ total comprehensive income
▪ owners' investments
▪ dividends
▪ owners' withdrawals of capital
PARTICULARS SHARE SHARE REVALUATION RETAINED TOTAL
CAPITAL PREMIUM RESERVE EARNINGS
OPENING BALANCE XXX XXX XXX XXX XXXX
CHANGE IN ACCOUNTING XX/(XX) XX/(XX)

POLICY
TOTAL XXX XXX XXX XXX XXXX

REVALUATION GAIN/LOSS XX/(XX) XX/(XX)
TRANSFERRED TO (XX) XX
RETAINED EARNINGS
TOTAL COMPREHENSIVE X X
INCOME FOR THE PERIOD
DIVIDENDS (X) (X)
ISSUE OF SHARE CAPITAL X X XX
BALANCE AS AT 31ST XXX XXX XXX XX/(XX) XXX

MARCH
1) Problem on SOCIE
▪ An entity Apple has the following balances at 1st January 2015
Amount ( $ )
▪ Share Capital ($1 Nominal value) 1,00,000
▪ Share Premium 50,000
▪ Retained earnings 2,00,000
▪ During the year 2015, Apple issued 50,000 shares at $ 1.20 and paid all shareholders a
dividend of $ 0.10 per share.
▪ Profit after tax amounted to $ 1,20,000.
▪ During the year 2016, there is a Revaluation gain of $50,000 and loss incurred amounted
to $10,000. No dividends were declared for 2016.
▪ You are required to prepare the Statement of Changes in Equity for the year ended 31 st
December 2015 and 2016 for Apple. Also give the interpretations based on the 2 years
statement of changes in equity.
2.
▪ Logo Ltd, a public company, has an Authorized share capital of 500,000 $1 ordinary shares. On 1
January 2017, the issued share capital was 100,000 $1 ordinary shares. On 31 March 2017 the
company issued a further 100,000 ordinary shares at $1.50 each.
▪
▪ On 30 September 2017 there was a bonus issue of 1 ordinary share for every 5 held.
▪
▪ You are required to:
i. Record the transactions in the Ledger Accounts of Logo Ltd.
ii. show the Statement of Changes in equity.
3.
1. An entity has the following balances at 1st January 2015
▪ Amount ( $ )
▪ Share Capital ($2 Nominal value) 5,00,000
▪ Share Premium 50,000
▪ Retained earnings 4,00,000
▪ Revaluation reserve 1,00,000
▪ During the year 2015, the company issued 100,000 shares at $ 2.20, it paid all shareholders a dividend of $ 0.50
per share. Profit after tax amounted to $ 2,20,000.
▪ During the year 2016, there is a Revaluation gain of $50,000 which is already adjusted in the comprehensive
income statement. The profit after adjusting revaluation gain amounted to $70,000. Dividend were declared and
paid for 2016 as $ 0.10 for all shareholders. You are required to prepare the SOCIE for the year ended 2015 and
2016 for the company. Also give the interpretation based on the 2 years statement.
Cash Flow Statement
▪ The cash flow statement provides

▪ information about:
▪ • Cash Receipts (cash inflows)
▪ • Uses of Cash (cash outflows)
▪ • During a Period of Time
▪ Inflows and outflows are reported for:
▪ • Operating activities
▪ • Investing activities
▪ • Financing activities
Definition
▪ “ A statement prepared from the historical data (i.e., income

statement and balance sheet) showing sources and uses of cash is
called cash flow statement.”
▪ A cash flow statement presents information about the cashflows

associated with the company’s main Operations and those
associated with its investing and financing activities of the
period.
Objectives
▪ To show causes of changes in cash balances between two

balance sheet
▪ To indicate the factors contributing to the reduction in cash

balance inspite of increase in profits and vice versa
▪ provide information that assists in the assessment of their

liquidity,
solvency and financial adaptability.
Why Cash Flow Statement
▪ Statement provide information of cash receipt and cash

payment of the enterprise for the period.
▪ Its useful in assessing the enterprise cash flows is useful in

assessing liquidity, financial flexibility, profitability and risk
Advantages of cash flow
▪ Helps in internal financial management

▪ Helps in short term financial decisions relating to liquidity
▪ Shows major sources and uses of cash.
▪ Helps in planning the repayment of loans, replacement of assets, credit
arrangements etc…
▪ Helps in efficient cash management
▪ Better tool of analysis
▪ Helps in planning for the investment of surplus or meeting the deficit
▪ Helps to determine the likely cash flows
▪ Budgeting decisions.
Limitations
▪ Influenced by changes in management policies.

▪ Misleading inter-firm comparison.
▪ Cannot be equated with income statement.
▪ Misleading comparison over a period of time.
▪ Misleading inter-industry comparison.
Classifications of Cash Flows
Operations: Cash received and paid for day-to-day activities

with customers, suppliers, and employees.
Investing : Cash paid and received from buying and selling
long-term assets.
Financing: Cash received and paid for exchanges with
lenders and stockholders.
Classification of Cash in-flows and outflows
From sales of goods and To wages salary payments

services to customers To suppliers for purchases of
From receipt of customer inventories
advances To other operating expenses
From receipt of interest Operating Activities To interest payments
revenue or dividends or rent To tax payments
revenue or similar revenue To advance payments to
items suppliers
From sale of PPE and other
To purchase PPE and other
long-term assets Investing Activities long-term assets
From collection of loans
To make loans and to collect
From sale of common or such loans
preferred stock
To repay debt
From issuance of short or long Financing Activities To pay dividends
term debt
Indirect Method
▪ The indirect method of presenting cash flows from operating

activities relies upon information that is disclosed in the
financial statements.
▪ The starting point is normally profit before tax, which is then

adjusted to remove(add back) any noncash items or accruals-
based figures included in the statement of profit or loss.
Drawbacks of a statement of cash flows
▪ The statement of cash flows uses historic cash flows

▪ No interpretation of the statement of cash flows is provided
within the accounts.
▪ Non-cash transactions, e.g. bonus issues of shares and
revaluations of assets are not highlighted
Adjustments-Operating Activities
▪ Non cash Items: bad debts, depreciation and amortization do

not require any cash outflow in the current period.
▪ Hence we add them back to net profit to arrive at net cash
flow from operating activities.
▪ Non operating items: gains and losses on disposal of fixed

assets and investments, interest income and interest expenses
from the operating activities section to the investing or
financing activities as appropriate.
▪ Changes in working capital: we adjust net profit for
changes in working capital items like trade receivables,
inventories, prepaid expenses, and trade payables.
▪ Ex: If trade receivables increased during the current period

,cash received from customers will be less than sales reported
in the profit or loss account.
▪ Here we add if there is any decrease , similarly we deduct if

there is any increase in the amount.
▪ Depreciation –NCI- added back to profit before tax because it is a
noncash expense
▪ Loss on disposal of non-current assets –NOI- the loss is a non-
cash expense and is added back to profit before tax: the cash
proceeds on disposal will be classified as an investing activity cash
inflow
▪ Interest payable expense –NOI- added back to profit before tax
because it is not part of cash generated from operations
▪ Increase/decrease in inventory –WCI- inventory represents
purchases made in one accounting period, but which will be charged
against profit in another accounting period.
Relationships to the Balance Sheet and the Income Statement
Change in
account
balances during
the year
Current Assets Current Liabilities

Subtract from Add to
Increase
net income. net income.
Add to Subtract from
Decrease
net income. net income.
Use this table when adjusting Net Income to Operating Cash Flows using the
indirect method.
Converting net profit into operating cash flow
requires three kind of adjustment
Non –cash Items Non-Operating items Working capital items
+ Depreciation + Interest Expenses + Decrease in trade

+Depletion + Loss on sales of fixed assets receivables
+Amortization + loss on sales of investments + Decrease in inventories
+ Bad Debt Expense -Interest income + Decrease in prepaid
-Expenses provision written -Gain on sales of fixed assets expenses
back -Gain on sales of investment -Increase in trade receivables
+ Provision for tax -Increase in inventories
-Increase in prepaid expenses
-Decrease in trade payables
Cash Flows from Operating Activities - Indirect Method
The indirect method adjusts net income
by analyzing noncash items.
Changes in current assets
and current liabilities.
Cash Flows
Net from Operating
Income Activities -
Indirect Method
+ Noncash
expenses such as
+ Losses and
depreciation and
- Gains
amortization.
Indirect Method- operating activities-
Adjustments to net income
Net income
+ noncash expenses: depreciation, amortization, provisions to
expenses/debtors, etc
+ non operating expenses: Finance cost
+ loss on sale of asset
- gain on sale of asset
- Changes in working capital items
+ increases in current liabilities
+ decreases in current assets
- decrease in current liabilities
-increase in current assets
▪ = Cash flow from operating activities
Format of the Cash Flow Statement
Name of the Company

Cash Flow Statement
For the period …
Cash from operating activities A

Cash from investing activities B
Cash from financing activities C
Net Change in Cash D = (A+B+C) increase or (decrease)
+ Beginning Cash balance CB, from the beginning balance sheet
Ending Cash balance =CB + D should equal to ending
cash balance in the ending balance sheet.
Non-cash Investing and Financing Activities
Q1.From the following balances you are required to
calculate cash from operations using Indirect Method:
Q2. Prepare statement of cash flows from Operating
activities Indirect Method
Q3.From the following balances you are required to
calculate cash from operations using Indirect Method.
Particulars 31/12/2014 (Rs.) 31/12/2015 (Rs.)
Debtors 55,000 47,000

Bills receivable 14,000 12,500
Creditors 20,000 25,000
Bills Payable 8,000 6,000
Outstanding expenses 1,000 1,200
Prepaid expenses 800 700
Accrued Income 600 750
Income received in Advance 300 250
Profit after tax --- 1,30,000

Q4.The following information is available for Akash
Ltd. for the year ended 31/03/2015:
▪ Income Statement Rs. 000
▪ Sales revenue 444
▪ Cost of sales (269)
▪ Gross Profit 175
▪ Distribution costs (35)
▪ Administrative expenses (8)
▪ Profit from Operations 132
▪ Finance Costs (18)
▪ Profit Before Tax 114
▪ Income tax expense (42)
▪ Profit for the year 72
▪ The expenses can be analyzed as follows;
▪ (Rs. 000)
▪ Wages 72
▪ Auditor’s remuneration 12
▪ Depreciation 84
▪ Cost of materials used 222
▪ Profit on disposal of non-current assets (60)
▪ Rental income (18)
▪ 312
▪ Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ The following information also available;
▪ 31/03/2015 31/03/2014
▪ Rs 000 Rs 000
▪ Inventories 42 24
▪ Receivables 48 42
▪ Payables (30) (18)
▪ Prepare a statement for cash generated from operations using
the Indirect Method for the year ended 31st march, 2015.

FSI-Chapter 2 - Horizontal Analysis

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FSI-Chapter 2 - Horizontal Analysis

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DEPARTMENT OF

Horizontal analysis is where changes in various

Amounts for comparative years are expressed as a

Calculating Change in Dollar Amounts

▪ Change in % =change in amount ÷ Base year

▪ Use both absolute and percentages

Items $ Base Year Current Year Amount Percentage

Net Income (4500) 1500 6000 -

Net sales 54,99,000

Interest income 39,000

Net income 5,22,000

2016 2015 Amount %

2016 (In US $) 2015 (In US $)

Other Expenses 186 69

Interest expenses 159 136

Profit before Income Tax 2002 2079

Tax 648 728

Net Income 1354 1351

From the above details prepare comparative horizontal analysis and

Vertical analysis is a method of financial statement analysis in

Vertical analysis involves finding out the relationship

▪ On the income statement, each item is expressed as

▪ To gain insight into the relative importance or

▪ For the year ended 31 December

Details 2012 2011 2010

Research and Development Expenses 320 358 400 513 617

Other Deduction (Income ) Net 40 40 44 136 32

Operating Income 481 537 578 594 874

A Statement of changes in equity and

The statement explains the changes in a

▪ Issue of share at par

▪ the statement of changes in equity should

CHANGE IN ACCOUNTING XX/(XX) XX/(XX)

TOTAL XXX XXX XXX XXX XXXX

BALANCE AS AT 31ST XXX XXX XXX XX/(XX) XXX

i. Record the transactions in the Ledger Accounts of Logo Ltd.

ii. show the Statement of Changes in equity.

▪ The cash flow statement provides

▪ “ A statement prepared from the historical data (i.e., income

▪ A cash flow statement presents information about the cashflows

▪ To show causes of changes in cash balances between two

▪ To indicate the factors contributing to the reduction in cash

▪ provide information that assists in the assessment of their

▪ Statement provide information of cash receipt and cash

▪ Its useful in assessing the enterprise cash flows is useful in

▪ Helps in internal financial management

▪ Influenced by changes in management policies.

Operations: Cash received and paid for day-to-day activities

From sales of goods and To wages salary payments

▪ The indirect method of presenting cash flows from operating

▪ The starting point is normally profit before tax, which is then

▪ The statement of cash flows uses historic cash flows

▪ Non cash Items: bad debts, depreciation and amortization do

▪ Non operating items: gains and losses on disposal of fixed

▪ Ex: If trade receivables increased during the current period

▪ Here we add if there is any decrease , similarly we deduct if

Current Assets Current Liabilities

Non –cash Items Non-Operating items Working capital items

+ Depreciation + Interest Expenses + Decrease in trade

Name of the Company

Cash from operating activities A

Non-cash Investing and Financing Activities