Questions on statement of cash flow

[Some-one]

let me attempt to explain...

(Increase)/Decrease in trade and other receivables, and prepayments(21,577,906) 11,015,633
Increase/(Decrease) in trade payables, other payables and accruals, and provisions 12,030,882 (24,831,569)

when there is an increase in trade receivables, you are allowing your customers to pay you late, so the () denotes a decrease in cashflow

when there is an increase in trade payables, you are delaying payment to your suppliers, so there is increase in cashflow and therefore no brackets

A similar logic for contracts in progress & inventories.

Try reading an accounting text for more examples, it has to do with reconciling many other items that make up the net profits

if () denotes a decrease in cashflow, why is it put as increase? See bold.

It says increase in trade and other receivables, and prepayments.
Not increase in cash.

So the interpretation should be "increase in trade and other receivables means a decrease in cash"? Assuming that this interpretation is correct, for FY2011 results, is it interpreted as "decrease in trade and other receivables means an increase in cash"?

Another question. If the increase in receivables means a decrease in cash as the company has not collected the payment from the client, why does a decrease in receivables means an increase in cash for FY2011 since both means that the company has not collected the payment from the client?

It is bracketed because it means "inverse". Increase in item means decrease in cashflow.

So yes increase in receivables means cash has not been received yet but does NOT mean cash decrease because net cash impact from WORKING CAPITAL is not just based on receivables. It is based on PAYABLES and INVENTORIES or WIP as well. It is also impacted by write offs so any decrease in recievables may just mean write offs in the extreme case.

So you have to read the cash impact in totality.

Based on your interpretation, if it does not mean cash decrease, can I say that when there is a bracket surrounding the figures, it does not mean cash outflow?

I read the book 'fundamental analysis for dummies'. It says that when there is a bracket, it means a cash outflow and doesn't cash outflow means a decrease in cash on the line trade receivables in the statement of cashflow?

[smallcaps]

Think one would probably get confused if think of each item in the cash flow statement as actual outflow/inflow of cash. For example, depreciation does not involve actual inflow/outflow of cash but it's considered in cash flow statement... Must remember that we are trying to derive indirectly from PBT and not by counting actual cash flows.

Thus, like what specuvestor has mentioned, might be good to stop thinking of each item individually as actual cash flows but how each item is related to each other and how they combine to give the final cash level.

[safetyfirst]

Simple summary, generally, all things being equal, when non-cash assets increase, there is outflow of cash. If non cash liabilities go up, there is inflow of cash...

the best way to figure out the "why" is to go run through some examples from accounting textbooks

" net cash impact from WORKING CAPITAL is not just based on receivables. It is based on PAYABLES and INVENTORIES or WIP as well. It is also impacted by write offs so any decrease in recievables may just mean write offs in the extreme case. So you have to read the cash impact in totality. " --> this statement from specuvestor is extremely important

[specuvestor]

if () denotes a decrease in cashflow, why is it put as increase? See bold.

It says increase in trade and other receivables, and prepayments.
Not increase in cash.

So the interpretation should be "increase in trade and other receivables means a decrease in cash"? Assuming that this interpretation is correct, for FY2011 results, is it interpreted as "decrease in trade and other receivables means an increase in cash"?

Another question. If the increase in receivables means a decrease in cash as the company has not collected the payment from the client, why does a decrease in receivables means an increase in cash for FY2011 since both means that the company has not collected the payment from the client?

It is bracketed because it means "inverse". Increase in item means decrease in cashflow.

So yes increase in receivables means cash has not been received yet but does NOT mean cash decrease because net cash impact from WORKING CAPITAL is not just based on receivables. It is based on PAYABLES and INVENTORIES or WIP as well. It is also impacted by write offs so any decrease in recievables may just mean write offs in the extreme case.

So you have to read the cash impact in totality.

Based on your interpretation, if it does not mean cash decrease, can I say that when there is a bracket surrounding the figures, it does not mean cash outflow?

I read the book 'fundamental analysis for dummies'. It says that when there is a bracket, it means a cash outflow and doesn't cash outflow means a decrease in cash on the line trade receivables in the statement of cashflow?

I know lecturers like to just simplifying by saying it is cash increase or decrease, but specifically it is more in terms of it being USED. If it is in bracket means there is an INCREASE in USE of cash for that item. The net impact of cash is based on the USE of cash in working capital. Your question is like asking if operating cashflow is negative does it mean cash in bank will decrease? Not necessarily if you just IPOed ie huge financing cash inflow for eg

But good that you are studying this because cash flow is MOST important for businesses. Only when businesses go IPO then they talk about PE

[Some-one]

Think one would probably get confused if think of each item in the cash flow statement as actual outflow/inflow of cash. For example, depreciation does not involve actual inflow/outflow of cash but it's considered in cash flow statement... Must remember that we are trying to derive indirectly from PBT and not by counting actual cash flows.

Thus, like what specuvestor has mentioned, might be good to stop thinking of each item individually as actual cash flows but how each item is related to each other and how they combine to give the final cash level.

For depreciation, I read that it is because depreciation is not a cash item so it makes sense to add them back. I am more confused with receivables and payables.

I read that it means company has not collect the payment from customer and has not pay their suppliers respectively and it is related to cash. More importantly, I would think statement of cashflow is the most important among the the so I am trying to understand it better.

[Temperament]

I think if you can figure out the whys increase / decrease of trade receivable & payable is as important. Another words, is there any "red flag" or not to the changes? I find it very difficult to find out. Any method, anyone?
Thanks.

[dzwm87]

You have to understand how all the 3 [or 4 if you include Statement of Changes in Equity] financial statements work together.

Essentially, most of the CF Statement reported is based on an indirect method, meaning they derive from either PBT (Profit Before Tax) or PAT (Profit After Tax) and flow the CF Statement based on the YoY changes in the Balance Sheet. Rarely do companies report in the direct method (i.e. actual cash transactions like cash paid to suppliers or cash received from customers). Indonesian companies follow this method.

So, to understand the changes in working capital, you have to understand that the F/S accounting is based on accrual accounting and not cash accounting. This means the $1 Revenue/Profit booked does not necessarily mean $1 in Cash. And the CF Statement account for what's not cash and what's cash transaction.

In a simpler case where we just look at the change in receivables:

Assuming in Year 1, Company A earns $100 in PAT but receivables increase from $20 in beginning of Year 1 to $40 in end of Year 1,
this means a net $20 is not in cold hard cash and still stuck in their receivables, which does imply that $20 of the $100 PAT is not real cash. Hence, this led to the term of "(Increase)/decrease in receivables" and why you put a ($20) in this account item.

This is an adjustment instead of actual cash outflow. You don't actually pay out $20 as receivables.

You should read up on "direct & indirect method for CF statement". It will give you a better picture.

[godjira1]

basically the CF statement starts off from the Income statement and adds/deducts the required adjustments to get a sense of the actual cash flowing thru the company. broadly but not exhaustive:

-minus cashflow
increase in receivables
increase in inventory
increase in capital goods/machinery/property
payout of dividends

+ cashflow
reduction in receivables
reduction in inventory
depreciation/amortization

[specuvestor]

^^ No offence to godjira but the above is the standard explanation for accounting students but allow me to add my 2cts

The appropriate way to look at cashflow is how the cash earned from customers is being USED/ deployed, rather than just an impasionate increase/decrease/plus/minus numbers game. That's why Buffett says it is about asset allocation. How you deploy your cash into generating more future cashflow for the asset.

For eg cash increases when business slows down and receivables goes down and working capital improves... Is that beneficial? Cash plowed into capex to improve competitivenes but reduce cash in bank is bad?

The standard accounting explanation is cashflow is derived from PnL. I would say PnL is derived from your cashflows, spiced with accrual accountings. Cashflow is the real lifeblood in a business. Understand how the business deploy their cash and you will be able to match or test what the management say, or what is the real ROIC of the asset. Or even a hint on whether the cash is stuck or worse, fake

[godjira1]

Specuvestor - u bring up the right questions to ask for sure.

My answer was of the basic 101 variety in this case but from my days back in school I knew people who struggled to get this relationship between how the 4 statements fit together. Without having a sound understanding of that it is difficult/impossible to ask the qualitative questions u raised.