1. GEM2508 1 A Finance Survival Kit GEM2508 Frederick H. Willeboordse frederik@chaos.nus.edu.sg

2. GEM2508 2 The Cash Flow Statement Lecture 3

3. GEM2508 3 Today’s Lecture Basic Excel Understand the elements of the Cash Flow Statement Make a simple Cash Flow Statement with MS Excel Where does it go? ?

4. GEM2508 4 Excel Basics – Graphs Graphs are easy to make. E.g. type some numbers and select them. Then go to the graph tool button and click on it. A handy wizard will pop up that gives you many options but for starters you can just click next.

5. GEM2508 5 Excel Basics – Graphs And this is the result that we get. The graph can be moved around and of course there are many options for labeling and representing the data. When selecting a graph by clicking on it, the data are highlighted by a colored box (blue in this case).

6. GEM2508 6 The Solver can be found in the Tools menu of Excel. If it’s not there, it can be installed by going to the “Add- ins” menu item and selecting the Solver Add-in. The power of the solver is that is can do mathematics without formulas. This is extremely useful when formulas are difficult or impossible to find. Excel Basics – Solver

7. GEM2508 7 For example, we have the situation to the left and we would like to find a value for cell B2 such that our calculation in cell B5 gives 2.5 as a result. Of course, we could easily do this by deriving a simple formula. But this time, let us use the solver. Go to the Tools menu and click on Solver. Excel Basics – Solver

8. GEM2508 8 Click Solve…. Select the Target Cell, the value and choose which cell should be changed. Excel Basics – Solver

9. GEM2508 9 The Solver will try to find a solution and automatically enter it in the spread sheet. A box asks you to confirm the solution. Click OK and we’re done. Excel Basics – Solver

10. GEM2508 10 Excel Basics – If-Then The If-then statement allows you to do logical tests. In this case we compare two numbers and indicate whether the first number is bigger or smaller. Note the quotation marks. These indicate that the text between them is a so-called string, i.e. actual text and not the name of a variable or so. The syntax of the if-then statement is given by:

11. GEM2508 11 Where does it go? Help! ? ? In daily life, we all know the experience.. Where did the money go? It’s good to know! In business it’s essential to know! Holiday.. Cash Flow

12. GEM2508 12 Cash Flow Statement The Cash Flow Statement is the third of the three basic financial statements. It is closely related to matters concerning the daily operation of a company. The Cash Flow Statement shows where the money goes (out-flows) and where it comes from (in-flows) during a certain period of time. It also shows the net in- or out-flow during that period of time. This is an extremely important number in the financial management of a company!

13. GEM2508 13 One way to look at the difference between the three basic financial statements. While the Balance Sheet shows cash balances and the Income Statement where the money comes from or goes to, the Cash Flow Statement shows why cash increased or deceased. Cash Flow Statement

14. GEM2508 14 In other words: + Beginning Cash Balance - Cash Out-Flows (Uses) + Cash In-Flows (Sources) = Ending Cash Balance Cash Flow Statement

15. GEM2508 15 The Cash Flow Statement is usually divided into three sections: Cash Flows from Operations These are the cash flows generated by the daily running of the business. E.g. the buying and selling of goods. Cash Flows from Investments Usually, with investments one means here fixed assets like plant and equipment. Cash Flows from Financing Loans play an important part in most businesses. Here, mainly, the cash flows related to the repayment of loans or the taking up of new loans are listed. This item could also e.g. contain the cash flows from issuing stock. Cash Flow Statement

16. GEM2508 16 Let’s first clean this up a bit … and then look at it in more detail … Incomprehensible!!! But difficult?? A Simple Cash Flow Statement

17. GEM2508 17 Use the Center and Merge Button Change the Font Make the total bold Underline before the subtotals Make the main items italic A Simple Cash Flow Statement

18. GEM2508 18 Many accountants compute the amounts for the Cash Flow Statement by using the Income Statement and the changes in the related Balance Sheet accounts. This is often called the T-account approach. Of course this only works if the relevant information is actually listed in the Income Statement and Balance sheet. Let us have a look at the items in the cash flow statement one by one. A Simple Cash Flow Statement

19. GEM2508 19 Cash Flows from Operations Receipts Here the most important receipts from daily operations for the business are listed. It is important to realize that the choice of what to list and what not is dependent on the nature of the company. Disbursements Here the most important disbursements necessary for the daily operations are listed. Again, the choice of what to list and what not depends on the nature of the company. Elements of a Cash Flow Statement

20. GEM2508 20 Cash Flows from Investing Activities Purchase of Equipment Most businesses cannot operate without some kind of investment. In order to get (and keep) a company running, it needs to buy certain equipment like e.g. computers and tools. Usually, such items can be used for many years which is why they are not listed under Cash Flow from Operations but separately. Sale of Equipment Of course one can also sell equipment previously bought. E.g. when one wants to upgrade or when one no longer wants it. Think of Singapore Airlines always wanting to have a nice new fleet. What to do with those old planes? One option is to sell them. Elements of a Cash Flow Statement

21. GEM2508 21 Cash Flows from Financing Activities Long Term Loan Knowing when and where to borrow money is an important aspect of management. If you borrow at the wrong moment at the wrong place you might end up in trouble. (Think Asian Crisis). On the other hand, if you have a great idea and give up on it due to lack of funds you might loose a fantastic opportunity. Since cash inflows (or outflows) due to loans are not part of daily operations, they are listed separately here. Payment of Dividends Of course the idea of ‘investing’ in a company as a shareholder is to get more money back than one puts in. Some companies return a part of their profits to the shareholders as dividends as a kind of interest on their shares (note: this is usually a rather small amount). Elements of a Cash Flow Statement

22. GEM2508 22 Net Change in Cash Balance The net change in cash balance is an important indicator for how well the company will be able to continue doing business. If the net change is strongly negative and the company has little or no cash left, it will almost certainly need new loans. It is good to know that one needs to plan for that. On the other hand if the cash flow is positive and there are little debts, extra cash for new investments or for dividends will be available. Elements of a Cash Flow Statement

23. GEM2508 23 Now let us look at how we can actually obtain some of the items from the Balance Sheet and the Income Statement. Cash Flow from Operating Activities Receipts Disbursements Payments from Customers =Sales - Change in Accounts Receivable To Suppliers=Cost of Goods sold + Change in Inventory – Change in Accounts Payable (for Inventory) Elements of a Cash Flow Statement

24. GEM2508 24 Example of a Cash Flow Statement

25. GEM2508 25 Example of a Cash Flow Statement

26. GEM2508 26 The Cash Flow Statement provides important information regarding the cash requirements of a company. (Parts of) the Cash Flow Statement can be derived from the Balance Sheet and the Income Statement by analyzing changes. Key Points of the Day