By: Monica Thompson Baldiviezo
Janneth
Companies are operating normally, ie companies that are in place they operate on a continuous, uninterrupted, continuously generating sales revenues, collection of credit sales, etc., And simultaneously made payments to cover the purchase of raw materials, materials and other inputs as well as to pay debts , Make investments, pay dividends, etc.. Consequently, we can talk about income and expense accounts.
cash flows and cash flows deal with the analysis of these flows of money.
The financial assessment is done through the systematic presentation of the financial costs and benefits of a project, are summarized by an indicator of profitability, which is defined based on a criterion, so that the project can be compared with other projects and serve as a tool for effective decision making regarding the appropriateness of doing or not.
For this reason, analysis of cash funds and deal with the analysis of those accounts money.
assessment then has two major steps:
- The systematization and presentation of costs and benefits in cash flow.
- The summary of these costs and benefits in an indicator to compare with other projects. This step is the intertemporal discount and calculation of a parameter of evaluation in order to identify the profitability of the project.
Cash flow and cash flow (also called cash flow) is a pattern that has systematically recorded revenue and costs year by year, so that funds can flow regarded as a synthesis of all studies conducted as part of the pre-investment phase (for ex-ante) or as part of the implementation phase (for ex-post).
There are important differences between cash flow and cash flow, because each of them is a different tool of analysis, although both are on the accounts of income and expenditure of money from the firm, either as working capital , or cash and equivalents.
Here are a few similarities and differences between cash flows and cash flow or cash.
Similarities between Cash Flow and Cash Flow
- Both are complementary Financial Statements Balance Sheet, Income Statement of Cost and the Statement of Changes in Equity, are complementary, because they provide complete information about the generation and application of funds (cash flow) and about the sources and uses of money (cash flow).
- Both states are prepared on the basis of two balance sheet.
- Both are produced by taking the net differences in each account of the balance sheet resulting from the changes that occurred between two consecutive dates mentioned.
Differences between Funds Flow and Cash Flow
- To prepare your cash flow, plus the general balances (two consecutive dates), we need the income statement on the last balance sheet.
- In the flow of funds, the concept of funds are net working capital: where "FUNDS = Resources Working Capital" and "NET FUNDS = Current Assets - Current Liabilities"
For - cash flow, the concept of funds are cash (money) or cash equivalents. Where: CASH = Cash and Cash Equivalents
Four basic elements make up the flow of funds, these are
-
operating Benefits - investment costs or assembly, ie the initial costs.
- Operating Costs
- scrap or salvage value of project assets.
Each of the elements should be characterized by:
- amount or magnitude
- location in time.
Each element is recorded in the cash flow, specifying the amount and the time it is received or disbursed.
The information required by the evaluator include prices, interest rate and exchange rate at the time, also need to specify that infalcionarionarias trends for this is done a rigorous analysis of possible changes that may be caused by the project, the next step well be the statistical information on free markets and government, national and international additionally require information from producers, traders, exporters and importers and other experts.
only information the assessor may know what the relevant price of each product or service and each input.
income and financing costs are calculated based on reliable data on the conditions of loans and other financial transactions and the value of the interest rate. As with the previous data the tester requires information from multiple sources, conditions in financial markets will be determined by the sources to be consulted.
For the calculation of cash flow or cash flow is prepared in a period between two consecutive dates: a start date and the other end, so as to identify operations that generated, revenue streams, including these two dates, just NSRF can determine which operations were used such money flows.
For the preparation of cash flow balance sheet is required initial and final balance sheet
For the construction of a flow of funds is necessary to have the cash accounting rather than accrual. In other words, that is, the various expenses are recorded when they are disbursed and not the time obligation is incurred, revenue is recorded when they are received.
flow of funds disbursed presents the costs and revenues received in each year of the project. Similarly, another unit could be used for the flow of time, months, semesters, etc..
The time period used to assess depends on the nature of the project and the characteristics of their costs and revenues. The flow of an agricultural project which is planted under conditions in the first half and on another in the second semester can be defined. The short-term projects such as construction and sale of property, generally use months as time unit.
PRESENTATION OF A CASH FLOW
The flow of funds for a new project is usually presented in matrix form, another way of presenting the cash flow is through a graphical representation that summarizes the flow and cut total costs and benefits.
In this form of representation Cash flow is measured along the horizontal axis, divided into units that represent periods of time. On the same axis with arrows point to the benefits and costs upwards are represented with arrows pointing down.
Cash flow and cash are planning tools and financial control, which complement the Preparation and Evaluation.
Taking this into account, the cash flows include:
- Historical Cash Flow, if the analyzed information concerning the financial statements of past efforts, in which case, definitely the cash flow or cash is an instrument of control, about the capacity the company had on these efforts to generate cash.
Projected Cash Flow, when based on a statement last estimated future flows of origin or source of funds, and applications or uses of funds. In this case the flows are financial planning tools.
The Cash Flow should be exposed through two states:
- Statement of Changes in Financial Position
- Statement of Cash Flows.
The two states are interdependent, so that one does not fulfill the objective of reporting on the flow of funds without informing the other.
Click on the image to enlarge.
Statement of Cash Flows
Source: Basic Financial Management. "Mr. Oscar G. Montalvo Claros."
process for preparing the cash flow
To illustrate the process for preparing a cash flow balance sheets are used comparable, show step by step as you build a cash flow.
- "Preparation Worksheet 7 columns"
column 1. Details of balance sheet accounts of the company.
column 2. Balances balance to the start date.
column 3. Balances balance to the ending date.
columns 4 and 5. is for the working capital accounts, ie assets and liabilities. Both columns form a set.
column 4. Where recorded differences in account balances (final minus initial), representing increases in working capital accounts.
column 5. Where recorded differences between the balances of the accounts, which represent decreases in working capital.
columns 6 and 7 . For different accounts for working capital, or to any other, except assets and liabilities.
column 6. This column record changes (differences in the balance, minus the initial balance) occurring in the balances of the accounts that represent sources of funds. Source of funds is the operation whose implementation increases the funds of the firm.
column 7. Column in which record changes (differences in the balance, minus the initial balance) occurred in the account balances of cash accounting. Application of funds is the operation that causes a decrease in the funds of the firm.
- Fill the worksheet with the information "ion corresponding to the beginning and ending balances in columns 1, 2, 3.
In column (1) of the table include the accounts of the balance sheet, starting with the Assets, and continuing through the Account Fund - Banking, to conclude with the Heritage group accounts, and ending with the sum of liabilities and Capital.
In column (2) the balances of the accounts of the balance that has the oldest date.
In column (3) shows the balances of balance sheet accounts of the deadline. At this point, you can display horizontally the balances. Calculate
- occurring variations in account balances of working capital, taking into account that the formula for working capital.
WORKING CAPITAL = ASSETS - LIABILITIES
- An increase in the balance of account assets causes an increase in working capital.
- A decrease in the balance of an account of the causes decremnto assets in working capital.
- An increase in the balance of an account of liabilities causes a decrease in working capital.
- A decrease in the balance of an account current liabilities causes an increase in working capital.
These four rules are possible variations in the equation for working capital, as shown below:
is called:
CT = AC
Working Capital = Current Assets = Liabilities
PC
CT = AC - PC
The explanation is as follows: If the value of AC increases, without modifying the PC, the CT value will be higher.
Likewise if you lower the value of AC without changing PC, then the value of CT decreases, and so on. Calculate
- occurring variations in the balances of the accounts other than working capital, taking into account the rules outlined in the following scheme:
accounts earnings and management performance (profit or loss) should be treated as equity accounts item.
rules resulting from the above scheme are as follows: Active
- increases is an application of funds. Active
- decreasing is a source of funds. Passive
- increases is a source of funds. Passive
- decreasing is an application of funds.
- positive results (profits) are a source of funds.
- losses are increasing application funds.
- Heritage is an increasing source of funds.
- The decline of heritage is an application of funds.
Taking into account these rules are reduced in columns 6 and 7, the differences resultaten variations in accounts other than the working capital.
- The next step is to aggregate the columns increases in working capital (column 4) and decreases in working capital (column 5), and the difference between the totals.
- The result is interpreted as an increase in working capital (or increase the phones of the firm), if the sum of increases in working capital is greater than sum of working capital reductions.
- If the sum of reductions is greater than the increases, then there occurred a decrease in working capital (or reduction of funds).
We note that if:
- The increase in working capital is greater than the decrease in working capital, then, also, the sum of sources of funds is greater than the sum of application funds.
- The working capital reductions are greater than the increases in working capital, then, too: The total application of funds is greater than the sum of sources of funds.
- Just as in the previous step, the columns are totaled (6) sources of funds and (7) application of funds, distinguishing between the two, it must match the difference between columns (4) and (5), depending on whether the increase or decrease in working capital, according to what is explained in point.
- Once established the differences between the columns, first (4) and (5), and other (6) and (7) as shown in the box example, corresponds to summarize the information in the following states:
- Statement of changes in financial position, which turns the information contained in columns 4 and 5.
