Understanding financial statements:

Interpretation of the components of Cash Flow

of a customer

Why Cash Flow Statement is greatly important

in selecting a credit worthy borrower?
Cash is obtained by making sales, issuing short
term notes or using accounts payable and
accrued liabilities. Once obtained, cash is used
to pay expenses or to purchase inventory. The
inventory in turn is sold for cash or turned into
accounts receivable. There is a constant flow
from cash to non-cash assets and then back to
cash.
 Cash Flow Statement is one which show the
movement of cash in and out of a business.
 Distinction between Fund Flow and Cash
Flow Statement:
1. Cash flow statement excludes all
transactions not involving cash. For
example, transactions involving change in
finished goods to account receivable are
ignored in cash flow statement but form
part of Fund flow statement.
 Cash flow analysis can provide information
about a company’s liquidity, flexibility and
ability to generate future cash flow . The
relationship between items such as sales and
net cash flow from operating activities and
increases or decreases in cash makes it
possible to predict future cash flows.
 Cash flow analysis can provide information
about an entity’s ability to pay dividends
and meet its obligations. By examining the
difference between net income and net cash
flow, analysis can assess the reliability of
the income statement.
 Cash flow analysis can also provide
information concerning cash and non-cash
investing and financing transactions during a
period. This enables analysis to assess and
liabilities increased or decreased during a
period.
 A cash flow statement may be prepared in
respect of a new concern and also an
existing concern. The cash flow statement is
generally prepared for a number of years
which may include, in case of a new
concern, the construction period and the
operating period as well. The cash flow
statement shows the changes i.e. increases
and decreases; in the various items of
balance sheet and also incorporates the
working results of each year. The cash flow
statement is divided into two parts:
 a. Sources of funds which show inflow of
cash from various sources both capital and
revenue;
 b. Uses or application of funds which show
the outflow of cash for various purposes.
 A. Sources of cash
 1. Internal
 Net Profit(before taxes and interest
and after depreciation)
 Add: Depreciation
 Less: Taxes paid / payable
 (relating to the year)
 Less: Dividend paid / payable
 (relating to the year)
 Increase in share capital
 Increase in long term loans
 Increase in short term loans
 Increase in deferred payments
 On plant and machinery
 Sale of fixed assets and investments
 Other sources
 Total Sources of cash
 1. Capital expenditure (fixed assets) i.e.
purchase of building, equipment etc.
 2. Decrease in long term loans
 3. Increase in current assets
 4. Decrease in current liabilities
 5. Interest on borrowing
 6. Other expenses (tax, dividend etc)
 Net cash increased by:
 Opening cash & bank balance
 Closing cash & bank balance
 Cash flow statements have three main sections.
Cash from operating activities includes revenue
from selling goods and services and the
expenses that go along with running the
business. Sales, operating expenses, wages, and
income taxes are all considered to be cash from
operating activities.
 Cash from investing activities includes any
action that is taken to generate future
income. Some examples are buying land or
equipment or selling shares on the stock
market.
 Cash flow from financing activities includes
any money involved in loans or stock
dividends. This can include taking out loans,
repaying loans, and making dividend
payments.
Net Income 600000
Additions to Cash
Depreciation 200000
Increase in Accounts Payable 100000
Subtractions from Cash
Increase in Accounts Receivable (200000)
Increase in Inventory (300000)
Net Cash from Operation 400000
Cash Flow from Investing
Purchase of Equipment (50000)

Cash Flow from Financing

Notes Payable 75000
Cash Flow for month end 425000
December 2022
ways to manage cash flow
1. Don’t wait to send invoices.
2. Adjust your inventory as needed.
3. Lease your equipment instead of buying
it.
4. Borrow money before you need it.
5. Reevaluate your business operations.
6. Restructure your payments and
collections.
7. Monitor where your money is going.