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