CHAPTER 8

A. INTRODUCTION
a. The 3 financial statements (BS, IS, CFS) are important for BOTH accounting and non-
acctg personnel of the company and stakeholders, since they are interested in terms of
the BOTTOM LINE, and HOW the cash flows are sourced, used, and managed.
B. DETERMINATION OF CASH FLOWS
a. Cash flows determined and calculated by extracting or getting the net changes b/w 2
balance sheet periods (cash beginning and cash end). The changes represent various
inflows and outflows during the period.
b. From the start of the accounting period of the company up to the end (like Jan Dec)
there are different cash flows, whether its inflow or outflow. The change caused by
these different flows results to the change in cash
c. The different cash flows are Net operating cash flows, Net investing CF, Net financing
CF. The sum of these cash flows is also the change in cash or would reflect the
change in cash above
d. Operating activities are the inflows/outflows of cash generated by the different
operating activities of the company. Its based on the NET PROFIT achieved during the
period, AND ADJUSTED for transactions that had NO EFFECT on the cash inflow or
outflow
i. Examples: deprecation, allowance for bad debt; which are all DEDUCTED FROM
revenue or income BUT DO NOT INVOLVE CASH, duh! Changes also in the
CURRENT assets and CURRENT liabilities are also calculated, either as inflow or
outflow. The effect of these flows is the NET CASH FLOW FROM OPERATIONS
which may be positive or negative.
e. Investing activities duh! This reports the in/out flow from investing activities. These
ins or outs are decreases or increases in long term assets. Net effect is called net CF
from IAs, w/c may be positive or negative
f. Financing activities reports the inflow or outflow of financing activities. These
financing activities include changes in the loans or debts, and paid in capital. Net effect
is called net CF from FAs, which may be positive or negative
C. MANAGERIAL PERSEPCTIVE OF CASH FLOWS
a. Managing cash flows is one of the most critical/crucial functions of management, IN
ORDER TO ensure cash flow balance. Example, if a companys CF increased during the
period due to profitable operations, then the company is most likely performing well. Or
if the CF came from financing sources, then it may indicate that the company has plans
to expand/grow. Additional CF may also come from sale of a LT Asset w/c would
indicate that the company is having problems to bring more cash for paying expenses
D. TRACING THE CASH INFLOWS AND OUTFLOWS
a. The process of inflow and outflow of funds is like going thru A TUNNEL that ends at the
ending cash value that is presented at the Balance (usually as Cash, End)
E. CASH FLOWS OF THE COMPANY
a. There are 7 basic CFs of a company [DEO-LRTA]s
i. Debt financing
ii. Equity financing
 iii. Operations
iv. Left side conversion
v. Right side conversion
vi. Timing differences and adjustments
vii. Asset and retained earnings reduction
F. MANAGEMENT ISSUES
a. The CF of a company may be regarded as the presentation and synthesis of all
transactions that happened during the period. The CF statement will respond to the
managers needs for info on the sources like where and how the cash resources were
used or obtained
b. CF from operating activities presents the net CF generated from the regular operations
of the business. Some MGMT QUESTIONS how much did the operating activities
contribute to cash flow? And is it positive or negative?
c. CF from IA may indicate the QUALITY OF THE IVNESTMENTS of the company. A question
might be is whether the company invested in LT assets that will benefit future years, or
how much the company received from dividends and income from said LT Assets. U
must know that LT Assets or capital is acquired to improve productivity and value
creating activities in the future of the company
d. CF from FA generally relates to the financing of the LT investments that were financed
either by LT debt or equity. The management questions answered by this CF statement
is what Is the cost of financing to the company? When and how much were paid for the
princ of the debt and for dividends to SH?
G. ILLUSTRATIVE CASE
H. STEPS IN PREPARING THE CASH FLOW STATEMENT
I. MANAGEMENT PERSEPCTIVE
a. Questions like whether the company was effective in its CF management are answered
by the CF statement.
b. Note that its better if the company use LT funds for LT assets because of the timing of
the cash flows. By doing such, the operating funds are free for operating requirements
(which they are supposed to answer), and that such wouldnt be tied up to LT assets
J. FREE CASH FLOW
a. FCF is a measure of financial performance. This represents CASH that a company is able
to generate AFTER SETTING ASIDE FUNDS required to maintain or expand its asset base.
The FCF allows the company to pursue opportunities that ENHANCE and IMPROVE
SHAREHOLDER VALUE. Without cash, it would be difficult to develop new products,
make acquisitions, pay dividends, or reduce debt
b. Computation for FCF:
i. Earnings after tax and add deprecation and amortization, the result is the
operating CF; and then deduct changes in working capital [w/c is obtained from
deducting current liabilities from current assets], and increase in capital
expenditures; the total is then the FCF
K. SUMMARY

CHAPTER 9
A. FINANCIAL STATEMENTS
a. The CF statement is a SNAPSHOT of the effectiveness and efficiency of management
decisions in terms of operations, financing and investments