Principles of Accounting: Cash Flow Statement, Trend Analysis, and Evaluation

This article covers the basics of cash flow statements, including cash flows from operating, investing, and financing activities. It also discusses trend analysis and how to calculate ratios. Finally, it evaluates the profitability, solvency, and investment potential of companies using a bottom-up approach to fundamental analysis, industry analysis, and market analysis.

Running head: PRINCIPLES OF ACCOUNTING 0
Principles of Accounting

PRINCIPLES OF ACCOUNTING 1
Contents
Introduction...........................................................................................................................................2
Statement of the cash flows...............................................................................................................2
Cash flows from operating activities.................................................................................................2
Cash flow from investing activities...................................................................................................2
Cash flow from financing activities...................................................................................................3
Statement of cash flow statement..........................................................................................................3
Konski Manufacturing.......................................................................................................................3
Reconciliation of Profit.....................................................................................................................5
Statement of Cash flow Statement.........................................................................................................5
KIM Limited......................................................................................................................................5
Reconciliation of Profit.....................................................................................................................7
Trend Analysis......................................................................................................................................9
Calculation of ratios............................................................................................................................10
Evaluation............................................................................................................................................12
Other resources....................................................................................................................................13
Bottom-Up Approach to Fundamental analysis...........................................................................13
Industry analysis..........................................................................................................................13
Market analysis............................................................................................................................13
References...........................................................................................................................................14

PRINCIPLES OF ACCOUNTING 2
Introduction
Statement of the cash flows
In financial accounting a cash flow is also known as the statement of cash flows
which depicts the accounts of the balance sheet with respect to change and the income is
affecting the cash and the cash equivalents. The description is broken down to operating,
investing and the financing activities (Gitman, Juchau, & Flanagan, 2015).
The cash flow statement is prepared mainly for the purpose of the recording of the
inflow and the outflow of the case. The disclosure of the operating results and the changes
which are accompanied in the balance sheet are disclosed in the cash flow statement
(Nurnberg, 2015). The cash flow statement reflects the liquidity of the firm, the firms
working on the same level can be compared and improved accordingly and lastly also helps
in improving the performance and operational activities by eliminating the effects that aroise
due to the utilisation of the different methods (Wen, et al 2018).
Cash flows from operating activities
The first section determines the net cash inflow and the activities that are directly
attributable to the operating activities. The main business activities are included such as
buying, selling, providing services (Cable, Healy & Sun, 2018). It includes the amount spent
on the business directly such as cash paid to suppliers, cash received form the customers. The
extra ordinary items are deleted and the net amount is treated as the cash flow from the
operating activities.
Cash flow from investing activities
It determines the company’s aggregate change in a company’s cash position resulting
from amounts spent on the investments. The gains or losses through and the changes results

PRINCIPLES OF ACCOUNTING 3
in investment gains or losses (Lewellen & Lewellen, 2016). It is separately reported because
it provides the information of the fact as to whether the company is investing in the profit
based resources or whether it is disposing of the resources already.
Cash flow from financing activities
The cash flow from financing activities is the last item in the format of the cash flow
statements. This activity reports the issuance and repurchases of the company’s own bonds
and stock ant the payment of the dividends. The repayment of the borrowings and the interest
payable is also recorded (Qian & Yeung, 2015).
Statement of cash flow statement
Konski Manufacturing
Statement of cash flow of Konski Manufacturing
Cash flow from operating activities
Cash reciepts from customers 6418000
Cash payment to suppliers 4013000
Operating expenses paid 893000
Tax paid 353000
5259000
Net cash from operating activities 1159000
Cash flow from investing activities
Purchase of machinery
-
1370000
Proceeds from sale of machinery 723000
Net cash from investing activities -647000
Cash flow from financing activities
Acquisition of loan -200000
Proceeds from the retained earnings 230000
Net cash from financing activities 30000

PRINCIPLES OF ACCOUNTING 4
Net increase in cash and cash Equivalents 542000
Cash and cash equivalents at the beginning 130000
Cash and Cash equivalents at the end 672000
Reconciliation of Profit
Reconciliation of profit
Cash flows from operating activities
profit 430000
Adjustments to reconcile profit
Depreciation expense 880000
Increase in accounts receivable -165000
Decrease in Inventory -33000
Increase in accounts payable 20000
Loss on sale of machinery 27000
729000
115900
0
Statement of Cash flow Statement
KIM Limited
Statement of cash flow of Kim limited
Cash flow from operating activities
Cash reciepts from customers 5080
Cash payment to suppliers 2515
Operating expenses paid 993
Tax paid 510
4018
Net cash from operating activities 1062
Cash flow from investing activities

PRINCIPLES OF ACCOUNTING 5
Proceeds from sale of land 125
purchase of land -170
Purchase of Equipment -379
Purchase of a new building -305
Net cash from investing activities -729
Cash flow from financing activities
issue of shares against land -100
issue of share capital 300
Interim dividend -300
Issue of borrowings 300
Final Dividend -100
Net cash from financing activities 100
Net increase in cash and cash Equivalents 433
Cash and cash equivalents at the beginning 340
Cash and Cash equivalents at the end 773
Reconciliation of Profit
Reconciliation of profit
Cash flows from operating activities
profit 1022
Adjustments to reconcile profit
Depreciation expense 130
Decrease in accounts receivable 40
Increase in Inventory -130
Doubtful debts 58
Decrease in accounts payable -80
Gain on sale of equipment -75
gain in sale of land -30
Baddebts 32
Amortisation 15
-40
1062

PRINCIPLES OF ACCOUNTING 6
Multiple Choice Questions
Questio
n no.
Answer
1 C
2 B
3 A
4 C
5 D
6 B
7 A
8 D
9 B
10 C
Trend Analysis
Trend Analysis is one of the tools through which the monetary statements for the
investment purposes are being analysed. The main purpose of using the trend analysis is to
determine the financial position of the company.
5 YEAR
TERND
ANALYSIS
200
9
20
09
201
0
201
0
201
1
201
1
201
2
201
2
201
3

PRINCIPLES OF ACCOUNTING 7
Sales
198
549
0
67
59
7
3
%
205
308
7
-
237
46.0
-
0.
01
196
174
4
-
117
673
-
0.
06
186
781
7
-
140
478
-
0.
07
184
501
2
Gross profit
786
146
29
58
3
4
%
815
729
-
188
77.0
-
0.
02
767
269
-
863
16
-
0.
11
699
830
-
800
02
-
0.
10
706
144
Department
store EBIT
184
377
20
42
1
1
1
%
204
798
146
26.0
0.
08
199
003
-
793
82
-
0.
43
104
995
-
848
45
-
0.
46
995
32
Financial
Services EBIT
412
74
31
05
8
%
443
79
643
3.0
0.
16
477
07
814
4
0.
20
494
18
819
2
0.
20
494
66
Profit after
tax
156
522
14
24
4
9
%
170
766
116
17.0
0.
07
168
139
-
554
19
-
0.
35
101
103
-
549
68
-
0.
35
101
554
Amount of the item in the comparison year- amount of the item in the base
year
Percentage change = Dollar change /amount if the item in the base
year*100
Calculation of ratios
Debt to total asset ratio 2013 2012
Debt 436689 465193
Total assets 1237785 124089

PRINCIPLES OF ACCOUNTING 8
7
0.35 0.37
Profit Margin 2013 2012
Profit 101554 101103
Sales 1845012
186781
7
5.50 5.41
Asset Turnover Ratio 2013 2012
Total assets 1237785
124089
7
Sales 1845012
186781
7
0.67 0.66
Return on shareholder's
Equity 2013 2012
Net Income 101554 101103
Total Assets 1237785
124089
7
8.20 8.15
Dividend Pay-out Ratio 2013 2012
Total dividend available
709303.
8 699733
Net income available for the 101554 101103

PRINCIPLES OF ACCOUNTING 9
shareholders
6.98 6.92
Evaluation of the David Jones Limited’s profitability, solvency and investment potential
Evaluation
The profit is one of the key factors in determining the success of the company. The
profitability of the David Jones Ltd can be expressed on the basis of the financial year 2013
and the 2012. In the year 2012 the profit margin of the company was 5.41 and in the year
2013 it reached to 5.50. The profit margin increased but at a slow pace. While talking about
the solvency the debt to total asset ratio is 0.35 as compared to the previous year which
indicates that a lower ratio is better and the company is trying to improve the financing
choices (Campbell, 2015). From the point of the investment the return on shareholders’
equity and the dividend pay-out ratio is both are increasing in the year 2013. A higher ratio
indicates a higher return and the potential for the investor in the future (O'Donovan, 2017).
Therefore the company is performing well and consistently and can improve the profit
margin to sustain for longer time.

PRINCIPLES OF ACCOUNTING 10
Other resources
Apart from analysing the trends and the ratios the company needs to have another
outlook in order to decide whether to invest in the shares of the company or not are as
follows.
Bottom-Up Approach to Fundamental analysis
While the bottom-up approach directly focuses on the basics of the company. It gives
an estimate about the competitors, financial status and the potential earnings and the value of
the market (Marková & Hrvoľová, 2016).
Industry analysis
Individual companies tend to keep a track of the general market movements, but the
degree may vary accordingly (Penman, 2015). The industry analysis is the key factor in
making decisions as to whether to invest in the shares of the David Jones Limited or not
(Mathuva, 2015).
Market analysis
If the market faces any kind of recession or the inflation the price of the stock gets
affected and therefore, the economic activity has a major implication on the overall stock
prices (Zeepedia.com, 2017).

PRINCIPLES OF ACCOUNTING 11
References
Cable, R. J., Healy, P., & Sun, N. (2018). The Changes in Cash Flows from Operating
Activities and Related Debt and Interest Coverage Ratios of Fortune 200 Companies–
An Analysis of FASB's Proposed Accounting Standards Update. International
Research Journal of Applied Finance, 9(5), 232-240.
Campbell, J. L. (2015). The fair value of cash flow hedges, future profitability, and stock
returns. Contemporary Accounting Research, 32(1), 243-279.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson
Higher Education AU.
Lewellen, J., & Lewellen, K. (2016). Investment and cash flow: New evidence. Journal of
Financial and Quantitative Analysis, 51(4), 1135-1164.
Marková, J., & Hrvoľová, B. (2016). Share Valuation Using the Comparative Method. Acta
Oeconomica Pragensia, 2016(6), 16-37.
Mathuva, D. (2015). The Influence of working capital management components on corporate
profitability.
Nurnberg, H. (2015). Cash Flow Statement. Wiley Encyclopedia of Management, 1-7.
O'Donovan, G. (2017). Solvency II: stakeholder communications and change. Routledge.
Penman, S. H. (2015). Financial Ratios and Equity Valuation. Wiley Encyclopedia of
Management, 1-7.
Qian, M., & Yeung, B. Y. (2015). Bank financing and corporate governance. Journal of
Corporate Finance, 32, 258-270.

PRINCIPLES OF ACCOUNTING 12
Zeepedia.com, (2017) Economy and market Analysis. Retrieved from
http://www.zeepedia.com/read.php?bottom-up_top-
down_approach_to_fundamental_analysis_investment_analysis_and_portfolio_manag
ement&b=26&c=14
Wen, M. M., Lin, H. A., Born, P. H., Yang, C., & Wang, C. (2018). Cash Flow Risk
Management in the Property/Liability Insurance Industry: A Dynamic Factor
Modeling Approach. North American Actuarial Journal, 1-14.