7-1
Chapter 7
Fund Analysis,Cash-
Flow Analysis,and
Financial Planning
7-2
Fund Analysis,Cash-Flow
Analysis,and Financial Planning
?Flow of Funds (Sources and Uses)
Statement
?Accounting Statement of Cash-Flows
?Cash-Flow Forecasting
?Range of Cash-Flow Estimates
?Forecasting Financial Statements
7-3
Flow of Funds Statement
Has been replaced by the cash flow
statement (1989) in U.S,audited
annual reports.
A summary of a firm’s changes in
financial position from one period to
another; it is also called a sources and
uses of funds statement or a statement
of changes in financial position.
7-4
Why Examine the Flow
of Funds Statement
QUESTION?
Why should we bother to
understand a Flow of Funds
Statement that is no longer
required to appear in U.S,
audited annual reports?
7-5
Why Examine the Flow
of Funds Statement
? Includes important noncash transactions while
the cash flow statement does not.
? Is easy to prepare and often preferred by
managers for analysis purposes over the more
complex cash flow statement
? Helps you to better understand the cash flow
statement,especially if it is prepared under the
Indirect method.
The Flow of Funds Statement:
7-6
Flow of Funds Statement
All of the firm‘s investments and
claims against those investments,
Extends beyond just transactions
involving cash.
What are funds?
7-7
Sources and
Uses Statement
The letters labeling
the box stand for
Uses,Sources,
Assets,and
Liabilities (broadly
defined),The pluses
(minuses) indicate
increases
(decreases) in
assets or liabilities.
A L
- +
+ -
S
U
7-8
BWs’ Determination
of Sources and Uses
$ 100 - S
410 - S
616 + U
5 --
9 + U
$ 1,140 N/A
930 N/A
(299) N/A
$ 631 + U
50 --
223 --
$ 2,044
Cash and C.E,$ 90
Acct,Rec,394
Inventories 696
Prepaid Exp 5
Accum Tax Prepay 10
Current Assets $ 1,195
Fixed Assets (@Cost) 1030
Less,Acc,Depr,(329)
Net Fix,Assets $ 701
Investment,LT 50
Other Assets,LT 223
Total Assets $ 2,169
Assets 19X3 19X2 +/- S/U
7-9
BWs’ Determination
of Sources and Uses
$ 100 $10 S
410 16 S
616 80 U
5 --
9 1 U
$ 1,140 N/A
930 N/A
(299) N/A
$ 631 70 U
50 --
223 --
$ 2,044
Cash and C.E,$ 90
Acct,Rec,394
Inventories 696
Prepaid Exp 5
Accum Tax Prepay 10
Current Assets $ 1,195
Fixed Assets (@Cost) 1030
Less,Acc,Depr,(329)
Net Fix,Assets $ 701
Investment,LT 50
Other Assets,LT 223
Total Assets $ 2,169
Assets 19X3 19X2 +/- S/U
7-10
BWs’ Determination
of Sources and Uses
$ 295 - U
94 --
16 --
100 --
$ 505 N/A
453 + S
200 --
729 --
157 + S
$ 1086 N/A
$ 2,044
Notes Payable $ 290
Acct,Payable 94
Accrued Taxes 16
Other Accrued Liab,100
Current Liab,$ 500
Long-Term Debt 530
Shareholders?Equity
Com,Stock ($1 par) 200
Add Pd in Capital 729
Retained Earnings 210
Total Equity $ 1,139
Total Liab/Equity $ 2,169
Liabilities and Equity 19X3 19X2 +/- S/U
7-11
BWs’ Determination
of Sources and Uses
$ 295 $ 5 U
94 --
16 --
100 --
$ 505 N/A
453 77 S
200 --
729 --
157 53 S
$ 1086 N/A
$ 2,044
Notes Payable $ 290
Acct,Payable 94
Accrued Taxes 16
Other Accrued Liab,100
Current Liab,$ 500
Long-Term Debt 530
Shareholders?Equity
Com,Stock ($1 par) 200
Add Pd in Capital 729
Retained Earnings 210
Total Equity $ 1,139
Total Liab/Equity $ 2,169
Liabilities and Equity 19X3 19X2 +/- S/U
7-12
Basic Sources
and Uses Statement
USES $156
Increase,Inventories $80
Increase,Accrued Taxes 1
Decrease,Notes Payable 5
Increase,Net Fixed Assets 70
$156
SOURCES
Increase,Retained Earnings $ 53
Decrease,Accounts Receivable 16
Increase,Long-Term Debt 77
Decrease,Cash + Cash Equivalents 10
7-13
Adjusting the Basic Sources
and Uses Statement
The following three slides are
Basket Wonders’ Balance Sheet
and Income Statement that was
discussed in Chapter 6.
This information will be needed
to adjust the basic Sources and
Uses Statement.
7-14
Basket Wonders’ Balance
Sheet (Asset Side)
a,How the firm stands on
a specific date.
b,What BW owned.
c,Amounts owed by
customers.
d,Future expense items
already paid.
e,Cash/likely convertible
to cash within 1 year.
f,Original amount paid.
g,Acc,deductions for
wear and tear,
Cash and C.E,$ 90
Acct,Rec.c 394
Inventories 696
Prepaid Exp d 5
Accum Tax Prepay 10
Current Assetse $1,195
Fixed Assets (@Cost)f 1030
Less,Acc,Depr,g (329)
Net Fix,Assets $ 701
Investment,LT 50
Other Assets,LT 223
Total Assetsb $2,169
Basket Wonders Balance Sheet (thousands) Dec,31,19X3a
7-15
Basket Wonders’ Balance
Sheet (Liability Side)
a,Note,Assets =
Liabilities + Equity.
b,What BW owed and
ownership position.
c,Owed to suppliers for
goods and services.
d,Unpaid wages,
salaries,etc.
e,Debts payable < 1 year.
f,Debts payable > 1 year.
g,Original investment,
h,Earnings reinvested.
Notes Payable $ 290
Acct,Payablec 94
Accrued Taxes d 16
Other Accrued Liab,d 100
Current Liab,e $ 500
Long-Term Debt f 530
Shareholders’ Equity
Com,Stock ($1 par) g 200
Add Pd in Capital g 729
Retained Earnings h 210
Total Equity $1,139
Total Liab/Equitya,b $2,169
Basket Wonders Balance Sheet (thousands) Dec,31,19X3
7-16
Basket Wonders’
Income Statement
a,Measures profitability
over a time period.
b,Received,or receivable,
from customers.
c,Sales comm.,adv.,
officer‘s salaries,etc.
d,Operating income.
e,Cost of borrowed funds.
f,Taxable income.
g,Amount earned for
shareholders,
Net Sales $ 2,211
Cost of Goods Sold b 1,599
Gross Profit $ 612
SG&A Expenses c 402
EBITd $ 210
Interest Expensee 59
EBT f $ 151
Income Taxes 60
EATg $ 91
Cash Dividends 38
Increase in RE $ 53
Basket Wonders Statement of Earnings (in thousands)
for Year Ending December 31,19X3a
7-17
Adjusting the Basic Sources
and Uses Statement
Recognize Profits and Dividends
Change in retained earnings is composed
of profits and dividends.
Source,Net Profit $91
Less Use,Cash Dividends 38
(Net) Source,Incr.,R.E,$53
7-18
Adjusting the Basic Sources
and Uses Statement
Recognize Depreciation and Gross
Changes in Fixed Assets
Change in net fixed assets is composed
of depreciation and fixed assets.
Source,Depreciation $ 30
Less Use,Add,to F.A,100
(Net) Use,Incr.,Net F.A,$ 70
7-19
Sources and Uses
Statement (Sources Side)
SOURCES
Funds provided by operations
Net Profit $ 91
Depreciation 30
Decrease,Accounts Receivable 16
Increase,Long-Term Debt 77
Decrease,Cash + Cash Equivalents 10
$224
7-20
USES
Dividends $ 38
Additions to fixed assets 100
Increase,Inventories 80
Increase,Accrued Taxes 1
Decrease,Notes Payable 5
$224
Sources and Uses
Statement (Uses Side)
7-21
Analyzing the Sources
and Uses Statement
Uses
Primarily through
an increase in
inventories and
expenditures on
capital assets.
Sources
Primarily
through net
profit from
operations and
long-term debt
increases.
7-22
Statement of Cash Flows
operating activities,
investing activities,and
financing activities.
A summary of a firm‘s payments
during a period of time,
This statement reports cash inflows
and outflows based on the firm’s
7-23
Statement of Cash Flows
Cash Flow from operating activities
Shows impact of transactions not
defined as investing or financing
activities,These cash flows are
generally the cash effects of
transactions that enter into the
determination of net income.
7-24
Cash Flow From
Operating Activities
Cash Inflows
From sales of goods or services
From interest and dividend income
Cash Outflows
To pay suppliers for inventory
To pay employees for services
To pay lenders (interest)
To pay government for taxes
To pay other suppliers for other
operating expenses
7-25
Cash Flow From
Operating Activities
It would seem more logical to classify
interest and dividend income as an
investing?inflow,while interest paid
certainly looks like a financing?outflow,
But,the U.S,Financial Accounting Standards
Board -- by a slim 4 to 3 vote -- classified these
items as operating?flows.
7-26
Statement of Cash Flows
Cash Flow from financing activities
Shows impact of all cash transactions
with shareholders and the borrowing
and repaying transactions with lenders.
Cash Flow from investing activities
Shows impact of buying and selling fixed
assets and debt or equity securities of
other entities.
7-27
Cash Flow From
Investing Activities
Cash Inflows
From sale of fixed assets (property,plant,
equipment)
From sale of debt or equity securities
(other than C.E.) of other entities
Cash Outflows
To acquire fixed assets (property,plant,
equipment)
To purchase debt or equity securities
(other than C.E.) of other entities
7-28
Cash Flow From
Financing Activities
Cash Inflows
From borrowing
From the sale of the firm’s own equity
securities
Cash Outflows
To repay amounts borrowed
To repurchase the firm’s own equity
securities
To pay shareholders dividends
7-29
Indirect Method --
Statement of Cash Flows
Cash Flow from Operating Activities
Net Income $ 91
Depreciation 30
Decrease,accounts receivable 16
Increase,inventories ( 80)
Increase,accum,tax prepay ( 1)
Net cash provided (used) by
operating activities $ 56
7-30
Indirect Method --
Statement of Cash Flows
Cash Flow from Investing Activities
Additions to Fixed Assets $(100)
Net cash provided (used) by
investing activities $(100)
7-31
Indirect Method --
Statement of Cash Flows
Cash Flow from Financing Activities
Increase,notes payable $ ( 5)
Increase,long-term debt 77
Dividends paid ( 38)
Net cash provided (used) by
financing activities $ 34
7-32
Indirect Method --
Statement of Cash Flows
Increase (decrease) in cash
and cash equivalents $
( 10)
Cash and cash equivalents,19X2 100
Cash and cash equivalents,19X3 $ 90
Supplemental cash flow disclosures
Interest paid $ 59
Taxes paid 60
7-33
Direct Method --
Statement of Cash Flows
Cash Flow from Operating Activities
Cash received from customersa $2,227
Cash paid to suppliers and
employeesb
(2,051)
Interest paid ( 59)
Taxes paidc ( 61)
Net cash provided (used) by
operating activities $ 56
7-34
Worksheet for Preparing
Operating Activities Section
Sales $2,211
+(-) Decrease (increase) in AR 16
Cash received from customersa $2,227
COGS - Depreciation + SGA $1,971
+(-) Increase (decrease) in inventory 80
Cash paid to suppliers and
employeesb $2,051
Income taxes (federal / state) $ 60
+(-) Incr (Decr) in accum,tax prepay 1
Taxes paidc $ 61
7-35
Direct Method --
Statement of Cash Flows
Cash Flow from Investing Activities
Additions to Fixed Assets $(100)
Net cash provided (used) by
investing activities $(100)
7-36
Direct Method --
Statement of Cash Flows
Cash Flow from Financing Activities
Increase,notes payable $ ( 5)
Increase,long-term debt 77
Dividends paid ( 38)
Net cash provided (used) by
financing activities $ 34
7-37
Direct Method --
Statement of Cash Flows
Increase (decrease) in cash
and cash equivalents $ ( 10)
Cash and cash equivalents,19X2 100
Cash and cash equivalents,19X3 $ 90
Supplemental cash flow disclosures
Net Income $ 91
Depreciation 30
Decrease,accounts receivable 16
Increase,inventories ( 80)
Increase,accum,tax prepay ( 1)
Net cash provided (used) by
operating activities $ 56
7-38
Cash Flow Forecasting
? Determine the future cash needs of the firm
? Plan for the financing of these needs
? Exercise control over cash and liquidity of
the firm
A Cash Budget is a forecast of a firm’s future
cash flows arising from collections and
disbursements,usually on a monthly basis.
The financial manager is better able to:
7-39
The Sales Forecast
? Sales representatives project sales
for the period in question (sales
under their control or management),
? Sales projections are screened and
consolidated for product lines.
? Product line sales projections are
consolidated into a single forecast.
Internal Sales Forecast
7-40
The Sales Forecast
? Economists project overall
economic and business trends that
will affect the firm.
? Expected market share is projected
for current and new product lines.
? Product line sales projections are
consolidated into a single forecast.
External Sales Forecast
7-41
BWs Cash Flow Forecast
Lisa Miller has finalized a cash flow
forecast for the first six months of 19X4,
Lisa is expecting 90% of monthly sales
will be credit sales with 80% of credit
sales collected in 30 days,20% in 60 days,
and no bad debts.
Hint,The cash flow forecast will be used
in forecasting the financial statements
later in this chapter.
7-42
Collections and Other
Cash Receipts
(Thousands)
SALES NOV DEC JAN FEB
Credit Sales,90% $193 $212 $154 $135
Cash Sales,10% 21 24 17 15
Total Sales,100% $214 $236 $171 $150
CASH COLLECTIONS
Cash sales,current $ 17 $ 15
80% of last month’s 169 123
credit sales
20% of 2-month-old 39 42
credit sales
Total sales receipts $225 $180
7-43
SALES MAR APR MAY JUN
Credit Sales,90% $256 $205 $160 $190
Cash Sales,10% 28 23 18 21
Total Sales,100% $284 $228 $178 $211
CASH COLLECTIONS
Cash sales,current $ 28 $ 23 $ 18 $ 21
80% of last month’s 108 205 164 128
credit sales
20% of 2-month-old 31 27 51 41
credit sales
Total sales receipts $167 $255 $233 $190
Collections and Other
Cash Receipts
(Thousands)
7-44
Schedule of Projected Cash
Disbursements (Thousands)
DEC JAN FEB
Purchases $ 39 $ 35 $ 64
CASH DISBURSEMENTS FOR PURCHASES
AND OPERATING EXPENSES
100% of last month’s $ 39 $ 35
purchases
Wages paid 90 94
Other expenses paid 34 34
Total disbursements (purchases
and operating expenses) $163 $163
7-45
MAR APR MAY JUN
Purchases $ 53 $ 40 $ 48 $ 50
CASH DISBURSEMENTS FOR
PURCHASES AND OPERATING
EXPENSES
100% of last month’s $ 64 $ 53 $ 40 $ 48
purchases
Wages paid 111 107 92 92
Other expenses paid 34 34 34 34
Total disbursements $209 $194 $166 $203
(purchases and
operating expenses)
Schedule of Projected Cash
Disbursements (Thousands)
7-46
Schedule of Net Cash
Disbursements
(Thousands)
JAN FEB MAR
Total disbursements for $163 $163 $209
purchases and operating
expenses
Capital Expenditures 70 40 0
Dividend payments 0 0 9
Income taxes 25 0 0
Total cash disbursements $255 $203 $218
7-47
Schedule of Net Cash
Disbursements
(Thousands)
APR MAY JUN
Total disbursements for $194 $166 $203
purchases and operating
expenses
Capital Expenditures 0 0 0
Dividend payments 0 0 10
Income taxes 25 0 0
Total cash disbursements $219 $166 $213
7-48
JAN FEB MAR
Beginning cash balance $ 90 $ 60 $ 37
Total cash receipts 225 180 167
Total cash disbursements 255 203 218
Net cash flow $( 30) $( 23) $( 51)
Ending cash balance
without additional financing $ 60 $ 37
$( 14)
Projected Net Cash
Flows and Cash
Balances
7-49
APR MAY JUN
Beginning cash balance $( 14) $ 22 $ 89
Total cash receipts 255 233 190
Total cash disbursements 219 166 213
Net cash flow $ 36 $ 67 $( 23)
Ending cash balance
without additional financing $ 22 $ 89
$ 66
Projected Net Cash
Flows and Cash
Balances
7-50
Range of
Cash-Flow Estimates
Examine factors that may influence cash
disbursements such as changes in the
state of the economy that impact
operations,capital expenditures and
dividend payments.
Examine factors that may influence cash
receipts such as changes in the state of the
economy that influence consumer buying
decisions and pricing strategies.
7-51
Management Uncertainty
in Ending Cash Balances
ENDING CASH BALANCE
(thousands)
January Distribution
PR
OB
AB
ILI
TY
O
F
OC
CU
RR
EN
CE
$42 $51 $60 $69 $78
7-52
Management Uncertainty
in Ending Cash Balances
ENDING CASH BALANCE
(thousands)
February Distribution
PR
OB
AB
ILI
TY
O
F
OC
CU
RR
EN
CE
$4 $15 $26 $37 $48
7-53
Summary of the Range
of Cash-Flow Estimates
? Allows examination of the
relevant factors which may
generate uncertainty regarding
future cash flows.
? Enables management to better
plan for contingencies that will
arise than using a single-point
estimate of monthly cash flows.
7-54
Forecasting
Financial Statements
(1) Forecasted Income Statement
(2) Forecasted Balance Sheet
Expected future financial statements
based on conditions that
management expects to exist and
actions it expects to take.
Considerations
7-55
Forecasting BWs’
Income Statement
Lisa Miller is forecasting the income
statement for 19X4,She estimates that sales
for the 6 months ended June 30 will be
$1,222,000,COGS are estimated from the
average of years 19X1 through 19X3,Selling,
general,and administrative costs are
forecasted at $34,000 per month,while the
income tax rate is assumed equal to 40%,
Cash dividends and interest expenses are
expected to remain constant.
7-56
Basket Wonders’ Forecasted
Income Statement
a,From sales budget.
b,Average of 68.7,71.3,
and 72.3% multiplied by
net sales.
c,$34,000 x 6 months.
d,Assumed to be $29,000.
e,Did not change,Six (6)
months of dividends =
(.5)($38,000) = $19,000,
Net Salesa $ 1,222
Cost of Goods Sold b 865
Gross Profit $ 357
SG&A Expenses c 204
EBIT $ 153
Interest Expensed 29
EBT $ 124
Income Taxes 50
EAT $ 74
Cash Dividendse 19
Increase in RE $ 55
Basket Wonders Forecasted Statement of Earnings (in
thousands) for Six Months Ending June 30,19X4
7-57
Basket Wonders’ Balance
Sheet (Asset Side)
a,Cash at min,balance
b,100% June,20% May
c,Inv Turnover = 2.5
d,Capital expenditure of
$110,000 and
depreciation of $57,000
ASSUMPTIONS
Cash and C.E.a $ 80
Acct,Rec.b 222
Inventoriesc 692
Prepaid Exp 5
Accum Tax Prepay 10
Current Assets $1,009
Fixed Assets (@Cost) 1140
Less,Acc,Depr,(386)
Net Fix,Assetsd $ 754
Investment,LT 50
Other Assets,LT 223
Total Assets $2,036
Forecasted Balance Sheet (thousands) June 30,19X4
7-58
Basket Wonders’ Balance
Sheet (Liability Side)
a,Previous balance less
amount paid down
b,100% of June
purchases
c,No net change in
accruals
d,Decrease in unpaid
wages,salaries,etc.
e,Increase in retained
earnings (See 7-49)
ASSUMPTIONS
Notes Payablea $ 226
Acct,Payableb 50
Accrued Taxes c 16
Other Accrued Liab,d 20
Current Liab,$ 312
Long-Term Debt 530
Shareholders?Equity
Com,Stock ($1 par) 200
Add Pd in Capital 729
Retained Earnings e 265
Total Equity $1,194
Total Liab/Equity $2,036
Forecasted Balance Sheet (thousands) June 30,19X4
Chapter 7
Fund Analysis,Cash-
Flow Analysis,and
Financial Planning
7-2
Fund Analysis,Cash-Flow
Analysis,and Financial Planning
?Flow of Funds (Sources and Uses)
Statement
?Accounting Statement of Cash-Flows
?Cash-Flow Forecasting
?Range of Cash-Flow Estimates
?Forecasting Financial Statements
7-3
Flow of Funds Statement
Has been replaced by the cash flow
statement (1989) in U.S,audited
annual reports.
A summary of a firm’s changes in
financial position from one period to
another; it is also called a sources and
uses of funds statement or a statement
of changes in financial position.
7-4
Why Examine the Flow
of Funds Statement
QUESTION?
Why should we bother to
understand a Flow of Funds
Statement that is no longer
required to appear in U.S,
audited annual reports?
7-5
Why Examine the Flow
of Funds Statement
? Includes important noncash transactions while
the cash flow statement does not.
? Is easy to prepare and often preferred by
managers for analysis purposes over the more
complex cash flow statement
? Helps you to better understand the cash flow
statement,especially if it is prepared under the
Indirect method.
The Flow of Funds Statement:
7-6
Flow of Funds Statement
All of the firm‘s investments and
claims against those investments,
Extends beyond just transactions
involving cash.
What are funds?
7-7
Sources and
Uses Statement
The letters labeling
the box stand for
Uses,Sources,
Assets,and
Liabilities (broadly
defined),The pluses
(minuses) indicate
increases
(decreases) in
assets or liabilities.
A L
- +
+ -
S
U
7-8
BWs’ Determination
of Sources and Uses
$ 100 - S
410 - S
616 + U
5 --
9 + U
$ 1,140 N/A
930 N/A
(299) N/A
$ 631 + U
50 --
223 --
$ 2,044
Cash and C.E,$ 90
Acct,Rec,394
Inventories 696
Prepaid Exp 5
Accum Tax Prepay 10
Current Assets $ 1,195
Fixed Assets (@Cost) 1030
Less,Acc,Depr,(329)
Net Fix,Assets $ 701
Investment,LT 50
Other Assets,LT 223
Total Assets $ 2,169
Assets 19X3 19X2 +/- S/U
7-9
BWs’ Determination
of Sources and Uses
$ 100 $10 S
410 16 S
616 80 U
5 --
9 1 U
$ 1,140 N/A
930 N/A
(299) N/A
$ 631 70 U
50 --
223 --
$ 2,044
Cash and C.E,$ 90
Acct,Rec,394
Inventories 696
Prepaid Exp 5
Accum Tax Prepay 10
Current Assets $ 1,195
Fixed Assets (@Cost) 1030
Less,Acc,Depr,(329)
Net Fix,Assets $ 701
Investment,LT 50
Other Assets,LT 223
Total Assets $ 2,169
Assets 19X3 19X2 +/- S/U
7-10
BWs’ Determination
of Sources and Uses
$ 295 - U
94 --
16 --
100 --
$ 505 N/A
453 + S
200 --
729 --
157 + S
$ 1086 N/A
$ 2,044
Notes Payable $ 290
Acct,Payable 94
Accrued Taxes 16
Other Accrued Liab,100
Current Liab,$ 500
Long-Term Debt 530
Shareholders?Equity
Com,Stock ($1 par) 200
Add Pd in Capital 729
Retained Earnings 210
Total Equity $ 1,139
Total Liab/Equity $ 2,169
Liabilities and Equity 19X3 19X2 +/- S/U
7-11
BWs’ Determination
of Sources and Uses
$ 295 $ 5 U
94 --
16 --
100 --
$ 505 N/A
453 77 S
200 --
729 --
157 53 S
$ 1086 N/A
$ 2,044
Notes Payable $ 290
Acct,Payable 94
Accrued Taxes 16
Other Accrued Liab,100
Current Liab,$ 500
Long-Term Debt 530
Shareholders?Equity
Com,Stock ($1 par) 200
Add Pd in Capital 729
Retained Earnings 210
Total Equity $ 1,139
Total Liab/Equity $ 2,169
Liabilities and Equity 19X3 19X2 +/- S/U
7-12
Basic Sources
and Uses Statement
USES $156
Increase,Inventories $80
Increase,Accrued Taxes 1
Decrease,Notes Payable 5
Increase,Net Fixed Assets 70
$156
SOURCES
Increase,Retained Earnings $ 53
Decrease,Accounts Receivable 16
Increase,Long-Term Debt 77
Decrease,Cash + Cash Equivalents 10
7-13
Adjusting the Basic Sources
and Uses Statement
The following three slides are
Basket Wonders’ Balance Sheet
and Income Statement that was
discussed in Chapter 6.
This information will be needed
to adjust the basic Sources and
Uses Statement.
7-14
Basket Wonders’ Balance
Sheet (Asset Side)
a,How the firm stands on
a specific date.
b,What BW owned.
c,Amounts owed by
customers.
d,Future expense items
already paid.
e,Cash/likely convertible
to cash within 1 year.
f,Original amount paid.
g,Acc,deductions for
wear and tear,
Cash and C.E,$ 90
Acct,Rec.c 394
Inventories 696
Prepaid Exp d 5
Accum Tax Prepay 10
Current Assetse $1,195
Fixed Assets (@Cost)f 1030
Less,Acc,Depr,g (329)
Net Fix,Assets $ 701
Investment,LT 50
Other Assets,LT 223
Total Assetsb $2,169
Basket Wonders Balance Sheet (thousands) Dec,31,19X3a
7-15
Basket Wonders’ Balance
Sheet (Liability Side)
a,Note,Assets =
Liabilities + Equity.
b,What BW owed and
ownership position.
c,Owed to suppliers for
goods and services.
d,Unpaid wages,
salaries,etc.
e,Debts payable < 1 year.
f,Debts payable > 1 year.
g,Original investment,
h,Earnings reinvested.
Notes Payable $ 290
Acct,Payablec 94
Accrued Taxes d 16
Other Accrued Liab,d 100
Current Liab,e $ 500
Long-Term Debt f 530
Shareholders’ Equity
Com,Stock ($1 par) g 200
Add Pd in Capital g 729
Retained Earnings h 210
Total Equity $1,139
Total Liab/Equitya,b $2,169
Basket Wonders Balance Sheet (thousands) Dec,31,19X3
7-16
Basket Wonders’
Income Statement
a,Measures profitability
over a time period.
b,Received,or receivable,
from customers.
c,Sales comm.,adv.,
officer‘s salaries,etc.
d,Operating income.
e,Cost of borrowed funds.
f,Taxable income.
g,Amount earned for
shareholders,
Net Sales $ 2,211
Cost of Goods Sold b 1,599
Gross Profit $ 612
SG&A Expenses c 402
EBITd $ 210
Interest Expensee 59
EBT f $ 151
Income Taxes 60
EATg $ 91
Cash Dividends 38
Increase in RE $ 53
Basket Wonders Statement of Earnings (in thousands)
for Year Ending December 31,19X3a
7-17
Adjusting the Basic Sources
and Uses Statement
Recognize Profits and Dividends
Change in retained earnings is composed
of profits and dividends.
Source,Net Profit $91
Less Use,Cash Dividends 38
(Net) Source,Incr.,R.E,$53
7-18
Adjusting the Basic Sources
and Uses Statement
Recognize Depreciation and Gross
Changes in Fixed Assets
Change in net fixed assets is composed
of depreciation and fixed assets.
Source,Depreciation $ 30
Less Use,Add,to F.A,100
(Net) Use,Incr.,Net F.A,$ 70
7-19
Sources and Uses
Statement (Sources Side)
SOURCES
Funds provided by operations
Net Profit $ 91
Depreciation 30
Decrease,Accounts Receivable 16
Increase,Long-Term Debt 77
Decrease,Cash + Cash Equivalents 10
$224
7-20
USES
Dividends $ 38
Additions to fixed assets 100
Increase,Inventories 80
Increase,Accrued Taxes 1
Decrease,Notes Payable 5
$224
Sources and Uses
Statement (Uses Side)
7-21
Analyzing the Sources
and Uses Statement
Uses
Primarily through
an increase in
inventories and
expenditures on
capital assets.
Sources
Primarily
through net
profit from
operations and
long-term debt
increases.
7-22
Statement of Cash Flows
operating activities,
investing activities,and
financing activities.
A summary of a firm‘s payments
during a period of time,
This statement reports cash inflows
and outflows based on the firm’s
7-23
Statement of Cash Flows
Cash Flow from operating activities
Shows impact of transactions not
defined as investing or financing
activities,These cash flows are
generally the cash effects of
transactions that enter into the
determination of net income.
7-24
Cash Flow From
Operating Activities
Cash Inflows
From sales of goods or services
From interest and dividend income
Cash Outflows
To pay suppliers for inventory
To pay employees for services
To pay lenders (interest)
To pay government for taxes
To pay other suppliers for other
operating expenses
7-25
Cash Flow From
Operating Activities
It would seem more logical to classify
interest and dividend income as an
investing?inflow,while interest paid
certainly looks like a financing?outflow,
But,the U.S,Financial Accounting Standards
Board -- by a slim 4 to 3 vote -- classified these
items as operating?flows.
7-26
Statement of Cash Flows
Cash Flow from financing activities
Shows impact of all cash transactions
with shareholders and the borrowing
and repaying transactions with lenders.
Cash Flow from investing activities
Shows impact of buying and selling fixed
assets and debt or equity securities of
other entities.
7-27
Cash Flow From
Investing Activities
Cash Inflows
From sale of fixed assets (property,plant,
equipment)
From sale of debt or equity securities
(other than C.E.) of other entities
Cash Outflows
To acquire fixed assets (property,plant,
equipment)
To purchase debt or equity securities
(other than C.E.) of other entities
7-28
Cash Flow From
Financing Activities
Cash Inflows
From borrowing
From the sale of the firm’s own equity
securities
Cash Outflows
To repay amounts borrowed
To repurchase the firm’s own equity
securities
To pay shareholders dividends
7-29
Indirect Method --
Statement of Cash Flows
Cash Flow from Operating Activities
Net Income $ 91
Depreciation 30
Decrease,accounts receivable 16
Increase,inventories ( 80)
Increase,accum,tax prepay ( 1)
Net cash provided (used) by
operating activities $ 56
7-30
Indirect Method --
Statement of Cash Flows
Cash Flow from Investing Activities
Additions to Fixed Assets $(100)
Net cash provided (used) by
investing activities $(100)
7-31
Indirect Method --
Statement of Cash Flows
Cash Flow from Financing Activities
Increase,notes payable $ ( 5)
Increase,long-term debt 77
Dividends paid ( 38)
Net cash provided (used) by
financing activities $ 34
7-32
Indirect Method --
Statement of Cash Flows
Increase (decrease) in cash
and cash equivalents $
( 10)
Cash and cash equivalents,19X2 100
Cash and cash equivalents,19X3 $ 90
Supplemental cash flow disclosures
Interest paid $ 59
Taxes paid 60
7-33
Direct Method --
Statement of Cash Flows
Cash Flow from Operating Activities
Cash received from customersa $2,227
Cash paid to suppliers and
employeesb
(2,051)
Interest paid ( 59)
Taxes paidc ( 61)
Net cash provided (used) by
operating activities $ 56
7-34
Worksheet for Preparing
Operating Activities Section
Sales $2,211
+(-) Decrease (increase) in AR 16
Cash received from customersa $2,227
COGS - Depreciation + SGA $1,971
+(-) Increase (decrease) in inventory 80
Cash paid to suppliers and
employeesb $2,051
Income taxes (federal / state) $ 60
+(-) Incr (Decr) in accum,tax prepay 1
Taxes paidc $ 61
7-35
Direct Method --
Statement of Cash Flows
Cash Flow from Investing Activities
Additions to Fixed Assets $(100)
Net cash provided (used) by
investing activities $(100)
7-36
Direct Method --
Statement of Cash Flows
Cash Flow from Financing Activities
Increase,notes payable $ ( 5)
Increase,long-term debt 77
Dividends paid ( 38)
Net cash provided (used) by
financing activities $ 34
7-37
Direct Method --
Statement of Cash Flows
Increase (decrease) in cash
and cash equivalents $ ( 10)
Cash and cash equivalents,19X2 100
Cash and cash equivalents,19X3 $ 90
Supplemental cash flow disclosures
Net Income $ 91
Depreciation 30
Decrease,accounts receivable 16
Increase,inventories ( 80)
Increase,accum,tax prepay ( 1)
Net cash provided (used) by
operating activities $ 56
7-38
Cash Flow Forecasting
? Determine the future cash needs of the firm
? Plan for the financing of these needs
? Exercise control over cash and liquidity of
the firm
A Cash Budget is a forecast of a firm’s future
cash flows arising from collections and
disbursements,usually on a monthly basis.
The financial manager is better able to:
7-39
The Sales Forecast
? Sales representatives project sales
for the period in question (sales
under their control or management),
? Sales projections are screened and
consolidated for product lines.
? Product line sales projections are
consolidated into a single forecast.
Internal Sales Forecast
7-40
The Sales Forecast
? Economists project overall
economic and business trends that
will affect the firm.
? Expected market share is projected
for current and new product lines.
? Product line sales projections are
consolidated into a single forecast.
External Sales Forecast
7-41
BWs Cash Flow Forecast
Lisa Miller has finalized a cash flow
forecast for the first six months of 19X4,
Lisa is expecting 90% of monthly sales
will be credit sales with 80% of credit
sales collected in 30 days,20% in 60 days,
and no bad debts.
Hint,The cash flow forecast will be used
in forecasting the financial statements
later in this chapter.
7-42
Collections and Other
Cash Receipts
(Thousands)
SALES NOV DEC JAN FEB
Credit Sales,90% $193 $212 $154 $135
Cash Sales,10% 21 24 17 15
Total Sales,100% $214 $236 $171 $150
CASH COLLECTIONS
Cash sales,current $ 17 $ 15
80% of last month’s 169 123
credit sales
20% of 2-month-old 39 42
credit sales
Total sales receipts $225 $180
7-43
SALES MAR APR MAY JUN
Credit Sales,90% $256 $205 $160 $190
Cash Sales,10% 28 23 18 21
Total Sales,100% $284 $228 $178 $211
CASH COLLECTIONS
Cash sales,current $ 28 $ 23 $ 18 $ 21
80% of last month’s 108 205 164 128
credit sales
20% of 2-month-old 31 27 51 41
credit sales
Total sales receipts $167 $255 $233 $190
Collections and Other
Cash Receipts
(Thousands)
7-44
Schedule of Projected Cash
Disbursements (Thousands)
DEC JAN FEB
Purchases $ 39 $ 35 $ 64
CASH DISBURSEMENTS FOR PURCHASES
AND OPERATING EXPENSES
100% of last month’s $ 39 $ 35
purchases
Wages paid 90 94
Other expenses paid 34 34
Total disbursements (purchases
and operating expenses) $163 $163
7-45
MAR APR MAY JUN
Purchases $ 53 $ 40 $ 48 $ 50
CASH DISBURSEMENTS FOR
PURCHASES AND OPERATING
EXPENSES
100% of last month’s $ 64 $ 53 $ 40 $ 48
purchases
Wages paid 111 107 92 92
Other expenses paid 34 34 34 34
Total disbursements $209 $194 $166 $203
(purchases and
operating expenses)
Schedule of Projected Cash
Disbursements (Thousands)
7-46
Schedule of Net Cash
Disbursements
(Thousands)
JAN FEB MAR
Total disbursements for $163 $163 $209
purchases and operating
expenses
Capital Expenditures 70 40 0
Dividend payments 0 0 9
Income taxes 25 0 0
Total cash disbursements $255 $203 $218
7-47
Schedule of Net Cash
Disbursements
(Thousands)
APR MAY JUN
Total disbursements for $194 $166 $203
purchases and operating
expenses
Capital Expenditures 0 0 0
Dividend payments 0 0 10
Income taxes 25 0 0
Total cash disbursements $219 $166 $213
7-48
JAN FEB MAR
Beginning cash balance $ 90 $ 60 $ 37
Total cash receipts 225 180 167
Total cash disbursements 255 203 218
Net cash flow $( 30) $( 23) $( 51)
Ending cash balance
without additional financing $ 60 $ 37
$( 14)
Projected Net Cash
Flows and Cash
Balances
7-49
APR MAY JUN
Beginning cash balance $( 14) $ 22 $ 89
Total cash receipts 255 233 190
Total cash disbursements 219 166 213
Net cash flow $ 36 $ 67 $( 23)
Ending cash balance
without additional financing $ 22 $ 89
$ 66
Projected Net Cash
Flows and Cash
Balances
7-50
Range of
Cash-Flow Estimates
Examine factors that may influence cash
disbursements such as changes in the
state of the economy that impact
operations,capital expenditures and
dividend payments.
Examine factors that may influence cash
receipts such as changes in the state of the
economy that influence consumer buying
decisions and pricing strategies.
7-51
Management Uncertainty
in Ending Cash Balances
ENDING CASH BALANCE
(thousands)
January Distribution
PR
OB
AB
ILI
TY
O
F
OC
CU
RR
EN
CE
$42 $51 $60 $69 $78
7-52
Management Uncertainty
in Ending Cash Balances
ENDING CASH BALANCE
(thousands)
February Distribution
PR
OB
AB
ILI
TY
O
F
OC
CU
RR
EN
CE
$4 $15 $26 $37 $48
7-53
Summary of the Range
of Cash-Flow Estimates
? Allows examination of the
relevant factors which may
generate uncertainty regarding
future cash flows.
? Enables management to better
plan for contingencies that will
arise than using a single-point
estimate of monthly cash flows.
7-54
Forecasting
Financial Statements
(1) Forecasted Income Statement
(2) Forecasted Balance Sheet
Expected future financial statements
based on conditions that
management expects to exist and
actions it expects to take.
Considerations
7-55
Forecasting BWs’
Income Statement
Lisa Miller is forecasting the income
statement for 19X4,She estimates that sales
for the 6 months ended June 30 will be
$1,222,000,COGS are estimated from the
average of years 19X1 through 19X3,Selling,
general,and administrative costs are
forecasted at $34,000 per month,while the
income tax rate is assumed equal to 40%,
Cash dividends and interest expenses are
expected to remain constant.
7-56
Basket Wonders’ Forecasted
Income Statement
a,From sales budget.
b,Average of 68.7,71.3,
and 72.3% multiplied by
net sales.
c,$34,000 x 6 months.
d,Assumed to be $29,000.
e,Did not change,Six (6)
months of dividends =
(.5)($38,000) = $19,000,
Net Salesa $ 1,222
Cost of Goods Sold b 865
Gross Profit $ 357
SG&A Expenses c 204
EBIT $ 153
Interest Expensed 29
EBT $ 124
Income Taxes 50
EAT $ 74
Cash Dividendse 19
Increase in RE $ 55
Basket Wonders Forecasted Statement of Earnings (in
thousands) for Six Months Ending June 30,19X4
7-57
Basket Wonders’ Balance
Sheet (Asset Side)
a,Cash at min,balance
b,100% June,20% May
c,Inv Turnover = 2.5
d,Capital expenditure of
$110,000 and
depreciation of $57,000
ASSUMPTIONS
Cash and C.E.a $ 80
Acct,Rec.b 222
Inventoriesc 692
Prepaid Exp 5
Accum Tax Prepay 10
Current Assets $1,009
Fixed Assets (@Cost) 1140
Less,Acc,Depr,(386)
Net Fix,Assetsd $ 754
Investment,LT 50
Other Assets,LT 223
Total Assets $2,036
Forecasted Balance Sheet (thousands) June 30,19X4
7-58
Basket Wonders’ Balance
Sheet (Liability Side)
a,Previous balance less
amount paid down
b,100% of June
purchases
c,No net change in
accruals
d,Decrease in unpaid
wages,salaries,etc.
e,Increase in retained
earnings (See 7-49)
ASSUMPTIONS
Notes Payablea $ 226
Acct,Payableb 50
Accrued Taxes c 16
Other Accrued Liab,d 20
Current Liab,$ 312
Long-Term Debt 530
Shareholders?Equity
Com,Stock ($1 par) 200
Add Pd in Capital 729
Retained Earnings e 265
Total Equity $1,194
Total Liab/Equity $2,036
Forecasted Balance Sheet (thousands) June 30,19X4
