Principles of Managerial Finance

CHAPTER 3 Cash Flow and Financial Planning 101

Hint Remember that in
finance, cash is king. Income
statement profits are good, but
they don’t pay the bills, nor do
asset owners accept them in
place of cash.

FIGURE 3.1 Cash Flows

The firm’s cash flows

Work in

Process

Overhead

Expenses

Business

Interests

Accounts

Payable

Raw

Materials

Accrued

Labor Wages

Fixed Assets

Debt

(Short-Term and

Long-Term)

Repayment

Payment of Cash Dividends

Repurchase of Stock

Sale of Stock

Borrowing

Sale

Purchase

Sale

Purchase

Equity

Finished

Goods

Operating (incl.

Depreciation) and

Interest Expense

Cash

and

Marketable

Securities

Taxes

Payment

Depreciation

Payment

of Credit

Purchases

Payment of Accruals

Cash Sales

Collection of Credit Sales

Refund

Sales

Accounts

Receivable

(1) Operating Flows (2) Investment Flows

(3) Financing Flows

Developing the Statement of Cash Flows

Thestatement of cash flows,introduced in Chapter 2, summarizes the firm’s cash

flow over a given period of time. Before discussing the statement and its interpre-

tation, we will review the cash flow through the firm and the classification of

inflows and outflows of cash.

The Firm’s Cash Flows

Figure 3.1 illustrates the firm’s cash flows. Note that marketable securities are

considered the same as cash because of their highly liquid nature. Both cash and

marketable securities represent a reservoir of liquidity that is increased by cash