Importance of the cash-flow list of investment activities

In the previous part ,we discussed the cash flow statement in operating activities . In this part , we will talk about the importance of cash flow statement in investing activities  . Attached an example which is the company budget and the  section of cash flow in investing activities, financing and cash movement .

Financial statement 2012

	2012	2011
	L.E	L.E
Noncurrent assets
Fixed assets	150000000	182500000
Projects in progress	9000000	6000000
intangible assets	500000	450000
Total noncurrent assets	159500000	188950000
stock	25750000	18000000
Clients and cash	27500000	14000000
Other debit balances	1050000	1250000
Cash in treasury and banks	25100000	14000000
Total current assets	79400000	47250000
Current liabilities
Allocations	2750000	3500000
Bank overdraft and credit checking accounts	4750000	6500000
Current section of the  long term loan	15000000	20000000
Suppliers and notes payable	30000000	22000000
Creditors and other credit balances	1650000	1450000
Total current liabilities	54150000	53450000
equity
paid capital	110000000	110000000
Legal reserve	14350000	10000000
profits	33650000	20480000
Total equity	158000000	140480000
Noncurrent liabilities
Long term loan	25000000	40000000
Deferred income tax	1750000	2270000
Total Noncurrent liabilities	26750000	42270000

Free cash flow statement for the ended year 2012

       

	notes	2012	2011
		L.E.	L.E.
Net  profits of the year before  income taxes		36150000	31050000
Adjustments of net profits with cash flows
of operating activities
Fixed assets depreciation		10500000	87500000
Intangible assets deprecation		50000	50000
Financing expenses		1750000	1450000
Assets decrease		2750000	2500000
allocations		1250000	850000
Currency differences		(150000)	(130000)
		52300000	44520000
Stock change		(7750000)	(1300000)
Clients and notes payable change		(13500000)	(15000000)
Other credit balances change		200000	(750000)
Suppliers and notes payable balances change		8000000	2500000
Creditors and other credit balances change		200000	(750000)
Used allocations		(700000)	(350000)
Financing expenses		(1750000)	(950000)
Paid income taxes		(1250000)	(1400000)
Net cash flow used in  operating  activities		35750000	26520000
cash flow of investing activities
receipts of selling fixed assets		850000	350000
Payments for buying fixed assets		(7500000)	(4500000)
Net cash flow used in investing activities		(6650000)	(4150000)
Financing activities cash flow
Change in short term loans		(3000000)	(1850000)
Receipts( payments ) of long term loans		(15000000)	(10000000)
Net cash flow of financing activities		(18000000)	(11850000)
Net cash change during the year		11100000	10520000
Cash and Cash equivalents –beginning of the year		14000000	3480000
Cash and Cash equivalents – end of the year		25100000	14000000

Investing activities Cash flow statement :

Investing activity is concerned with fixed assets and company investments ( equity or credit )

Transactions on cash flow statement in investing activities are either payments for buying fixed assets  or  starting projects in progress  ,or receipts of selling fixed assets or payments for buying investments in companies or receipts of selling investments. Capital gain or loss that is due to selling fixed assets or investments gain or loss or even revaluation of investments are not included in cash flow statement of investing activities . This is because the basis is received or paid cash only and we review the terms of cash flow statement .

Payments for buying projects in progress fixed assets:

When the company buys a fixes asset or starts a project in progress , there must be a record and list of fixed assets where the increase on the assets , during this period , is added . The increase may be buying  fixed assets or projects in progress that are completed ant will turn into fixed assets ( in this case it is non-cash ) so they will not affect the cash flow movement in the company .

In the example , there is a cash outflow with 7500000 which is deducted from the terms of investing activities cash flow .

There is a balance  that can be used  to calculate the payments of buying fixed assets 

= end fixed assets balance – start fixed assets balance + depreciation + book value of the assets ( if existed )

So we review additions to the fixed assets through cash  purchasing  and exclude transferred assets of projects in progress , Any asset bought on credit or non-cash is excluded and this will be discussed in a following part .

Selling fixed assets receipts  

On selling a fixed asset , there must be a gain or loss in the capital which id added to or deducted from the net earnings before tax in the adjustment term only and the basis is the received amount from selling the asset .

Fixed assets selling receipts are calculated by calculating the book value of sold assets .

the book value of sold assets

= beginning fixed assets balance + sold assets during the period- depreciation –ending fixed assets balance

Fixed assets selling cash receipts 

the book value of sold assets + capital gains  ( capital loss )

in this case the number is 850000 L.E.  which is cash inflow 

This can be applied to investing  companies and corporations included in stock market and non –investing companies as well .

Financing activities cash flow 

Financing activities concern with capital and financing structure 

In the financial statement of  the previous example we will notice no change in the capital paid in 2011 and 2012 which is 110000000 millions  , consequently there is no cash inflow or outflow .

Change in banking credit facilities :

Namely short term facilities which mean that the company contracts with the bank with certain facilities on fixed amount that can’t be exceeded and it is considered as a loan but in the limit of available balance . Of course there are interests for these loans . This change means that the difference between received  short term loans and paid loans during this period . It is better to separate the short term loans and paid loans .

In other words , you list  received short term loans during the period in the  cash flow statement  ( cash inflow ) 

The  paid short term loans during the period ( cash outflow ).

In the example , the cash outflow is deducted from the terms of financing activities and paid as long term loans .

Loan payments are considered cash outflow .

Paid loans = beginning loan balance + received cash during the period – ending loan balance

In our example :

40000000+ 0 -    25000000=15000000 millions ( cash outflow )

If there is any  received loans it will be cash inflow as in the short term loans 

So , according to the example 

Net operating activities cash flow is  35750000

Net investing activities cash flow is  (6650000)

Net financing activities cash flow is  (18000000)

The number in (  ) means a cash outflow.

First step :

Addition of net cash flow

We add each activity net cash  =   35750000+ (6650000) + ( 18000000)

Which is the net change in cash and cash equivalents during the period   =   11100000

Second step :

Cash balance 

It is the beginning cash balance and cash equivalents during the period of the statement 

In the example it is 14000000

Cash is the money in the treasury in the bank’s current accounts and demand deposits that aren’t mortgaged to the bank.

Cash equivalents :

They are securities or trade papers that can be sold or transferred into cash easily by the company with a maturity date of three months or less  . The risk in their value change is  little  . For example :

Treasury bills , commercial papers , marketplace securities .

Treasury bills :

A Treasury bill is a government debt obligation backed by with a maturity from one to 12 months .Of course there are interests. T-bills are considered a safe and secure investment since the government backs them. However, some holders may wish to cash out before maturity so they can resell the ills to the bank so it is a cash equivalent .

Commercial papers :

They are not ordinary commercial papers . they are mostly used in Europe and UAS . commercial papers are used by big companies and financial organizations and they are exchanged at the stock market . Because they last for less than 3 months , they are considered cash equivalents .

Back to the above example 

Net cash change is 11100000

+begining cash balance 14000000

= ending  cash balance and cash equivalents 25100000

Cash balance and cash equivalents must equal the cash balance exists in the current assets in the financial statement which is 25100000.