| Cash
Flows and Working Capital Analysis |
Statement of Cash Flows
- The primary purpose and objective is to identify and report
the
effects of cash inflows and cash outflows occurring during an operating
period
- Used to predict future cash flows for developing short run
operating budgets and long run capital budgets
|
3 Specific Areas of Activity
- Operating Activities
- all activities involving the exchange of goods and
services that produce sales revenue inflows for cash, or on credit
- the primary operating accounts involved in the production
of
sales revenue are current assets (for operating cash outflows ==>
current
liabilities)
- depreciation and amortization are automatic add back items
- Investing Activities
- involve the purchase of long-term assets/investments as
well as their disposal and sale
- Financing Activities
- involve items that change ownership equity
Note: having a net income does NOT infer that
cash will
increase by an equal amount because of noncash items included in an
accrual
accounting method (e.g., depreciation, amortization)
|
Working Capital
- Working Capital = Current Assets - Current
Liabilities [WC = CA - CL]
- working capital source inflows and outflows
inflow
source of WC
|
Net
Income
|
<=
Income =>
|
Net
Loss
|
outflow
use of WC
|
inflow
source of WC
|
Sold
an Asset
|
<=
Assets =>
|
Purchase
an asset
|
outflow
use of WC
|
inflow
source of WC
|
Borrowed
Funds
|
<=
Liabilities =>
|
Payment
on debt
|
outflow
use of WC
|
inflow
source of WC
|
Sale
of Stock
|
<=
OE =>
|
Buy
back stock
|
outflow
use of WC
|
|
|
Cash
Dividends =>
|
payment
of cash
|
outflow
use of WC
|
- Preparing a Statement of Changes to Working Capital
- do this to identify the net change in working capital
- incorporates the basic elements of horizontal comparative
analysis
- based on a source inflow and outflow uses that occurred
to working capital over an operating period
- shows the net change based on each source inflow that
increases WC, and each outflow use that decreased WC
- Note: money tied up in working capital is money that
is NOT working to earn income
|
Major Elements in Both the Statement of Cash
Flows and Analysis of Working Capital
- current assets
- a current asset increase is negative and deducted
- a current asset decrease is positive and added
- a current asset increase a no change in current
liabilities ==> increase in WC
- a current asset decrease a no change in current
liabilities ==> decrease in WC
- current liabilities
- a current liability increase is positive and added
- a current liability decrease is negative and deducted
- a current liability increase a no change in current
assets ==> decrease in WC
- a current liability decrease a no change in current
assets ==> increase in WC
- current ratio
- depreciation expense = positive effect =
add back
- amortization expense = positive effect =
add back
- loss, long-term asset disposal = positive
effect = add back
- gain, long-term asset disposal = negative
effect = deduct
|