FUNDS ANALYSIS, CASH FLOW ANALYSIS, AND FINANCIAL PLANNING
Flow of Funds Statement
ᴥ A summary of a firm’s changes in
financial position from one
period to another; it is also
called sources and uses of funds
statement or a statement of
changes in financial position.
ᴥ Flow of funds statement portrays
net rather than gross changes
between two comparable balance
sheets at different dates.
Bare-bones funds statement by
1. Determining the amount and
direction of net balance sheet
changes that occur between two
balance sheet dates,
2. Classifying net balance sheet
changes as either sources or
uses of funds, and
3. Consolidating this information
in sources and uses of funds
statement format.
Sources of Funds Uses of Funds
l Any decrease (−) in an asset item
l Any increase (+) in an asset item
l Any increase (+) in a claim item
l Any decrease (−) in a claim item
Adjustments
ᴥ Recognize Profits and Dividends.
ᴥ Recognize Depreciation and Gross
Change in Fixed Assets - knowing
called funds provided by
operations
Gross additions to fixed assets =
Increase (decrease) in net fixed
assets + Depreciation during period
Implications of Funds Statement
Analysis. The analysis of funds
statements gives us insight into the
financial operations of a firm that
will be especially valuable to you
if you assume the role of a
financial manager examining past and
future expansion plans of the firm
and their impact on liquidity.
Statement of Cash Flows - A summary
of a firm’s cash receipts and cash
payments during a period of
time.
The purpose of the statement of cash
flows is to report a firm’s cash
inflows and outflows, during a
period of time, segregated into
three categories: operating,
investing, and financing
activities.
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. Thus, there are items that
not all statement users might think
of as “operating” flows – items such
as dividends and interest received,
as well as interest paid.
Investing activities - Shows impact
of buying and selling fixed assets
and debt or equity securities of
other entities.
Financing activities - Shows impact
of all cash transactions with
shareholders and the borrowing and
repaying transactions with lenders.
Implications of Cash Flow Statement
Analysis.
ᴥ User gets a reasonably detailed
picture (especially under the
direct method) of a company’s
operating, investing, and
 financing transactions involving
cash.
Forecasting assets – If a cash
ᴥ Aids the user in assessing the
company’s current and potential budget is not available, the
future strengths and weaknesses. receivable balance may be estimated
on the basis of a receivable
turnover ratio. This ratio, which
Cash Flow Forecasting depicts the relationship between
credit sales and receivables, should
Dot-com – A company with a strong be based on past experience.
Internet presence that conducts much
or all of its business through its
website. The name itself refers to Inventory turnover ratio = Cost of
the period (dot) followed by the goods sold
abbreviation of the commercial (ending)
domain (.com) at the end of an e- Inventory
mail or web address; also called
dotcom or dot.com.
Cash budget – A forecast of a firm’s
future cash flows arising from
collections and disbursements,
usually on a monthly basis. Arrived
at through a projection of future
cash receipts and cash disbursements
of the firm over various intervals
of time.

Sales Forecast
The key to the accuracy of most cash
budgets is the sales forecast. This
forecast can be based on an internal
analysis, an external one, or both.
With an internal approach, sales
representatives are asked to project
sales for the forthcoming period.

Cash budget merely represents an

estimate of future cash flows

Forecast financial statements –

Expected future financial
statements based on conditions that
management expects to exist and
actions it expects to take.

Forecast income statement – Summary

of a firm’s expected revenues and
expenses over some future period,
ending with the net income (loss)
for the period.