Statement of cash flows

1. Objectives

Among the main objectives of the Statement of Cash Flows we have:

- Provide appropriate information to management, so that it can measure its accounting policies and make decisions that help the development of the company.

- Provide financial information to administrators, which allows them to improve their operation and financing policies.

- Project where the available cash has been spent, which will result in the decapitalization of the company.

- Show the relationship between net income and changes in cash balances. These cash balances may decrease despite positive net income and vice versa.

- Report past cash flows to facilitate;

Predicting future cash flows

Assessing how cash is generated and used by management

Determining the ability of a company to pay interest and dividends and to pay its debts when they become due.

Identify changes in the mix of productive assets.

From the foregoing, it can be inferred that the purpose of the Statement of Cash Flows is to present in an understandable way and information on the management of cash, that is, its collection and use by the entity during the determined period and, as a consequence, show a synthesis of the changes that have occurred in the financial situation so that the users of the financial statements can know and evaluate the liquidity or solvency of the entity.

The Statement of Cash Flows is designed with the purpose of explaining the movements of cash from the normal operation of the business, such as the sale of non-current assets, obtaining loans and contributions from shareholders and those transactions that include cash provisions such as purchase of non-current assets and payment of liabilities and dividends.

Purposes of cash control

Cash management is of primary importance in any business because it is the means of obtaining goods and services. Careful accounting of cash operations is required because this item can be quickly reversed. Cash management generally centers around two areas: cash budgeting and internal accounting control.

Accounting control is necessary to provide a basis for the planning function and also to ensure that the cash is used for the company's own purposes and not wasted, poorly invested, or stolen.

The administration is responsible for internal control, that is, for the protection of all company assets.

Cash is the most liquid asset in a business. An adequate internal control system is needed to prevent theft and prevent employees from using company money for personal use.

The purposes of internal control mechanisms in companies are as follows:

- Safeguard resources against waste, fraud and insufficiencies.

- Promote the proper accounting of data.

- Encourage and measure compliance with company policies.

- Judging the efficiency of operations in all divisions of the company.

Internal control is not designed to detect errors, but rather to reduce the opportunity for errors or fraud to occur. Some measures of internal cash control are to take all necessary precautions to prevent fraud and to establish an appropriate method of presenting cash in accounting records. A good accounting system separates cash handling from the function of registering it, making payments, or depositing it in the bank. All cash receipts must be recorded and deposited on a daily basis and all cash payments must be made by check.

2. Types of cash flows

In 1988, the financial statement that presented information on the company's most liquid assets and current liabilities was the Statement of Changes in the Financial position or statement of origin and Application of Funds.

Over the years, they developed a series of problems in the preparation of the Statement of Changes in Financial Position in accordance with the provisions of the accounting standards. There were deficiencies of comparison between different versions of the state since, according to the APB-19 standard, the funds could be defined as cash, or cash and temporary investments, or as fast-realization assets, or as working capital. Another problem was the diversity of presentation styles allowed by the APB-19 standard.

Cash Flow Statement-General

According to FAS-95, issued in 1995 the Statement of Cash Flows specifies the amount of net cash provided or used by the company during the year for its activities:

to. Operation

b. Investment

c. Financing

This new financial statement indicates the net effect of these movements on the cash and other cash equivalent items of the company. This statement includes a reconciliation of the balances at the end of the year and their equivalents.

Cash equivalents are short-term, highly liquid investments that:

to. They are easily exchangeable for certain amounts of cash, and

b. They are so close to maturity that the risk of changes in value due to changes in interest rates is negligible.

To the above we can add that the company must disclose the policy it uses to determine which items classify as cash equivalents. Any change in this policy is treated as a change in accounting principle and is made by retroactively modifying the financial statements of previous years that are presented for comparison.

Net gross cash flows

As a general rule, FAS-95 requires the disclosure of gross flows in the Statement of Cash Flows. The gross amounts of inputs and outputs are assumed to be more relevant than the net amounts.

However, in certain cases it may be sufficient to disclose the net amount of some assets and liabilities and not the gross amounts. According to FAS-95, net changes for the year can be disclosed when it is not necessary to know the gross changes to understand the company's investment and financing operation activities.

For rapidly rotating assets and liabilities, high amounts and maturing in the short term, the net changes obtained during the year may be disclosed. As an example are the collections and payments corresponding to:

- Investments, in documents that are not equivalent to cash.

- Loans receivable, and

- Debt, as long as the original maturity of the asset of the liability does not exceed three months.

Cash flows in foreign currency

The company that converts accounts expressed in foreign currency, or that has operations abroad, discloses in its Statement of Cash Flows and in its currency, the amount equivalent to foreign cash flows using the exchange rates, in effect, at flows occur.

Instead of the rates that were actually in effect when the flows occurred, the appropriately weighted average of the different rates in force during the year can be used, if it produces essentially the same results. The cash of the variations in the exchange rates on the balances held in foreign currency is disclosed in the Statement of Cash Flows as a separate component within the reconciliation for the exercise of the change in cash and its equivalents.

3. Basis of preparation

The bases to prepare the Cash Flow statement are:

- Two Statement of Position or Balance Sheets (that is, a comparative balance) referring to the beginning and end of the period to which the Statement of Cash Flow corresponds.

- An Income Statement for the same period.

- Supplementary notes to the items contained in these financial statements.

The preparation process basically consists of analyzing the variations resulting from the comparative balance to identify the increases and decreases in each one of the items in the Balance Sheet, culminating in the net increase or decrease in cash.

For this analysis, it is important to identify the cash flow generated by or destined for operating activities, which essentially consists of translating the net profit reflected in the Income Statement into cash flow, separating the items included in said result that did not imply receipt or disbursement of cash.

Likewise, it is important to analyze the increases or decreases in each of the other items included in the Balance Sheet to determine the cash flow from or destined to financing and investment activities, taking into account that accounting movements that only present transfers and do not imply movement of funds must be compensated for the purposes of the preparation of this statement.

Methodology to prepare the cash flow statement

For a better understanding we divide the methodology into five methods that we describe below:

Step 1. Determine the increase or decrease in cash

The first step is to quantify the change in the cash account balance from one period to another. This can be done simply by subtracting said balances, indicating whether this was an increase or decrease.

Example: 352,000.00 - 335,000.00 = B / 17,000.00

Step 2. Determine the increase or decrease in each of the accounts of the Statement of Financial Position

This step is similar to the previous point applied to all items in the Statement of Financial Position.

This step consists of identifying the impact on the cash flow of each of the increases or decreases of the differences from the Statement of Position. This analysis is performed taking as a reference the Income Statement and the accompanying notes to the financial statements.

Cash flow from operating activity

- Cash received from clients

Net sales

+ Decrease in accounts receivable

- Increase in accounts receivable

Explanation: To calculate the cash received from customers, the amount of net sales plus any decrease in accounts receivable is taken into account, since this would mean that in addition to sales, a part of said accounts was collected. Should accounts receivable increase, this amount would be deducted from sales since it would mean that not all sales would have been collected in cash.

to. Cash received from clients

Company XXX

Net sales

- Increase in accounts receivable

Cash received from clients

b. Cash paid for merchandise purchases

Sales cost

+ Increase in inventory or

- Decrease in inventory and

+ Decrease in accounts payable or

- Increase in accounts payable

Explanation: To calculate the cash paid for merchandise purchases, any increase in inventory is added to the cost of sales, since it would mean that you purchased more merchandise than you sold. Otherwise it would be subtracted. Additionally, any amount in the accounts payable to suppliers would be added to said amount, since it means that apart from what he bought, he paid a portion of the accounts payable that he had pending with his suppliers. Otherwise, the inverse calculation would be made.

Example:

At Compañía XXX, SA

Sales cost

+ Increase in inventories

+ Decrease in accounts payable

Cash paid for merchandise purchases

c. Cash paid for expenses

Expenses

- Non-disbursable expenses and

+ Increase in expense advances or

- Decrease in advances of expenses and

+ Decrease in accounts payable or

- Increase in accounts payable

Explanation: To calculate the cash paid for expenses, non-disbursable expenses (depreciation, uncollectible accounts) are subtracted from said amount, any increase in expense advances is added as it means that you paid more expenses than those incurred. Otherwise it is subtracted. Additionally, to this amount is added any decrease in accumulated expenses payable, since it means that apart from what he spent, he paid a portion of the accumulated expenses that he had pending. Otherwise, the inverse calculation will be made.

Example:

In Company XXX

Operating costs

- Non-expenditureable expenses

- Increase in wages and salaries

to pay

Cash paid for expenses

Note: a similar procedure will be followed if there are other types of expenses, such as interest expense and taxes.

2. Cash flow from or destined for investment activities

to. Cash paid for purchases of fixed assets

To calculate this amount, it is necessary to analyze the change suffered by this item in light of the Income statement and any other complementary information in this regard.

Example:

At Compañía XXX, SA

The net increase in fixed assets was B / 15,000.00. However, according to the complementary information, an asset with a cost of B / 5,000.00 and an accumulated depreciation of B / 4,000.00 was sold for B / 2,000.00, obtaining a profit of B / 1,000.00 in the operation. The above allows us to deduce that the purchase of fixed assets was B / 20,000.00

This can be verified by rebuilding the G / L accounts involved.

Example:

Fixed assets:

Initial balance

Acquisitions

Sales

Ending balance

Accumulated depreciation

Initial balance

Depreciation expense

Cancellation by cancellation

Ending balance

b. Cash received from sales of fixed assets

To calculate this amount, it is necessary to analyze the change suffered by this item in light of the income statement and any other complementary information in this regard.

At Compañía XXX, SA

According to the complementary information, an asset was sold for B / 2,000.00 at a cost of B / 5,000.00 and accumulated depreciation of B / 4,000.00 obtaining a profit of B / 1,000.00 in the operation. Therefore, the cash inflow for this concept was B / 2,000.00.

As support, you can analyze the fixed asset and accumulated depreciation accounts shown in the previous part.

c. Purchase and sale of temporary investments

To determine the cash flow generated by or applied to the temporary investment account, the G / L account corresponding to this item will have to be analyzed. As an example we present the following:

Initial balance B / 120,000.00

Total charges 38,000.00

Total subscriptions 18,000.00

Ending balance 140,000.00

From the analysis of said account the following can be concluded:

Temporary investments for B / 38,000.00 were purchased

Comment: Unless a loss has been incurred when selling the B / 18,000.00 of investments, it can be deduced that in exchange for said sale B / 18,000.00 was received in cash. If a loss had been incurred on the sale of said investments, say B / 3,000.00, then the amount of cash received would be only B / 15,000.00

At Compañía XXX, SA

This item does not exist

Cash flow from or destined for financing activities

to. Cash obtained from or destined to pay off loans

To calculate this amount, it is necessary to analyze the change suffered by items such as short and long-term bank liabilities and in the light of any other complementary information in this regard.

b. Cash received from shareholder contributions or intended for capital repayments

To calculate this amount, it is necessary to analyze the change in the share of capital stock in the light of any other complementary information in this regard.

c. Cash intended for dividend payment

To calculate this amount, it is necessary to analyze the change in the retained earnings item in light of any other supplementary information in this regard.

In company XXX, SA

The Income Statement of this company presents a profit of B / 11,000.00. However, in the Statement of Financial Position it is observed that this account only increases by B / 8,000.00, which allows us to think that the differential of B / 3,000.00 is due to a distribution of dividends, which is confirmed in the complementary information.

The above can be clearly visualized as follows:

Retained earnings

Initial balance B / 51,000.00

Period unit 11,000.00

Dividends paid (3,000.00)

Ending balance 59,000.00

Step 4. Classify increases and decreases in cash flow

The different cash inflows and outflows that were quantified in the previous point should be grouped into the following three categories:

- Cash generated by or destined for operations

- Cash generated by or destined for investment activities.

- Cash generated by or destined for financing activities.

Step 5. Integrate the Cash Flow Statement with said information

This step consists of preparing a Cash Flow Statement with the format and content previously defined.

Example:

Compañía XXX, SA Income statement for the month of March 199x

Operating income

- Cost of merchandise sold

Inventory 1/3/1998

+ Shopping

Total available

- Inventory 3/31/98

Cost of what is sold

Profit margin in Sales

- Operating costs:

Selling:

Wages and salaries

Depreciation

Bad debt expense

Of administration:

Leases

4. Analysis of items in cash flow

The following is a summary of how some ordinary items are analyzed in the models of the Cash Flow Statement.

Current assets

Additional investments in plant and equipment, or in product line sales promotions, are invariably accompanied by additional investments in the cash, accounts receivable, and inventories necessary to support these new activities.

In the cash flow model all investments at time zero are equal, regardless of how it is accounted for in the cumulative accounting model. In other words, the initial disbursements are recorded in the relevant cash flow scheme at time zero.

At the end of the project life, original machine disbursements may not be recovered or may only be partially recovered for the amount of final realization values.

By comparison, typically all original investments in accounts receivable and inventories are recovered when the project is completed. Therefore, all investments at time zero are normally considered as outflows at time zero, and their final realization values, if any, are considered as end-of-life flows of the project life.

As an example, suppose a company buys new equipment to make a new product. The required investment will also require additional working capital in the form of cash, accounts receivable, and inventories.

Book value and depreciation

In discounted cash approaches to cash flows from operations (before income tax), the book value and depreciation are not taken into account. Since the approach is fundamentally based on cash inflows and outflows and not on the concepts of accumulation of income and expenses, no adjustments should be made to cash flows due to the periodic allocation of the cost of the asset called expense. for depreciation (which is not a cash flow).

In the discounted cash flow approach, the initial cost of an asset is normally considered as a depreciation outflow of operating cash inflows. In other words, deduct depreciation from operating cash inflows.

Deducting periodic depreciation would be a double count of a cost that has already been taken into account as a total sum outflow. (For the study of how book value and depreciation affect post-tax cash flows from operations), as opposed to pre-tax cash flows from operations.

Current realization values and required investment

In a replacement decision, how should the calculations affect the current realizable value? For example, suppose that the current realization value of old equipment is B / 5,000 and that new equipment can be obtained for B / 40,000. There are several correct ways to analyze these games and they will all have the same effect on the decision. Generally, the easiest way to measure the investment required is, for example, canceling the current realization value of old assets (5,000) against the gross cost of new assets (40,000) and showing the net cash outflow at 35,000.00

Future realization values

The realizable value at the completion date of a project is an increase in cash inflow in the year of sale. Errors in the realization value forecast are seldom crucial, because their present value is generally small, particularly for amounts to be received in the distant future.