The Cash Flow Statement (CFS) differs from other accounting statements because it is prepared under the cash basis of accounting. For this reason, comparability with the other statements, which are prepared under the accrual basis, is impaired, especially with the Income Statement (IS).Failing to consider the financial perspective of the decisions made by managers can lead the company into situations in which it keeps idle financial resources, which represents a cost (opportunity cost of capital kept idle), or situations in which the company depends on emergency resources, which also generates financial costs that are often incompatible with the return generated by the business.The analysis and monitoring of cash flow information allows the manager to take present actions so that these situations do not occur in the future and, consequently, these unnecessary burdens do not arise. In this sense, a high added value can be observed for the manager with this service provided by accounting to their company, as it provides information so that they can plan their actions considering this important aspect and thus avoid these costs. Finally, the analysis and reporting models do not need to (and should not) be limited to what is recommended for external disclosure purposes, but rather should explore the informational potential of accounting without the limits imposed by the rules, in order to meet the manager’s specific needs in each circumstance.The Use of Cash Flow in Financial ManagementIn addition to allowing the manager to make financial decisions (raising and investing resources), cash flow management can also assist them in the company’s operational management, as long as the reports identify the relationships between cash and the other relevant accounts involved in the financial flow, as a consequence of the business.How cash affects the running of the companyWhen the manager chooses, for example, a certain purchasing policy, this choice affects cash through the operating cash flow from payments to suppliers, and this effect can be observed in the inventory account, for example; when they adopt a certain collection strategy, this affects the cash flow from accounts receivable, and this can be observed in the volume of accounts receivable; and so on.The focus of this aspect in cash flow analysis allows the manager to answer questions such as: how much of the cash generated by my activities have I committed? how much can I still commit? what is the effect of the investment decision on my financial breathing room?Another focus of analysis that the manager may have is the relationship between cash and the accounts of capital sources (liabilities and equity). Monitoring the elements of cash flow and the volume of these accounts provides the manager with support to evaluate alternatives and ways of raising funds from third parties, possibilities of new capital contributions from partners, or even the availability of resources for distributing profits to partners.Subdivisions of Cash FlowThere can be various models or forms of presenting cash flow, but the most conventional format, and perhaps the one that best expresses the dynamics of the effects of the main decisions made in the organization on its cash flow, is the one in which each element of the report is classified into three basic groups: operating flow, investment flow, and financing flow.The merit of this model may lie in allowing the user of the information to perceive three groups of decisions that affect cash in different ways, with different volumes and frequencies. This can indirectly help them even in classifying their decisions, so that it becomes clearer to them not only the distinct type of action they are taking, but also its effect on their financial “breathing room.”Subdivisions of Cash FlowThere are three groups of decisions that affect cash and, consequently, the company’s “financial breathing room,” and each of them is described below.Operational DecisionsOperational decisions are those that, from an initial perspective, affect accounts receivable from customers, inventories, suppliers, and accounts payable, that is, those that affect working capital.From a more analytical perspective, these decisions are those the manager makes in the day-to-day running of their business and involve their relationships with customers, suppliers, and their production process, and the financial reflection of all this is found in cash, more precisely, in the operating elements of cash flow. Therefore, analyzing the behavior of these elements in cash flow, concurrently with the behavior of these accounts, within each period and in light of the decisions made during the same period, allows the manager to understand the financial effects of their actions, decisions, attitudes, and operational strategies. Frequent monitoring of these operating elements in cash flow, as well as the behavior of these accounts, can help the manager review the policies, strategies, decisions, and actions that are compromising their financial breathing room and, with this, make corrections in future actions before more complicated situations can arise.Creditors, when analyzing whether or not to grant credit, will always verify the operation’s ability to generate sufficient cash flow so that the principal and interest can be recovered by the lending institution.The typical questions this analysis can answer are: how can I optimize cash generation with my operations?; what is the financial effect of a more aggressive sales policy?; what is the financial effect of a given purchasing policy?; and so on.Operating CycleSee the figure above, what can you do to interfere with the Operating Cycle?Investment DecisionsInvestment decisions are those related to fixed asset accounts (facilities, equipment, vehicles, etc.) and, consequently, to the strategies adopted regarding the installed capacity to be maintained, modernization of the structure, innovation, in short, decisions involving medium- and long-term effects.This analysis enables the manager to have more knowledge to answer questions such as: what have been the financial effects of capacity expansion strategies, technological innovation strategies, or expansion of our area of operation; what is the level of commitment of the cash flow from my operations to investments; what type of investments, etc.?The manager always expects that investment in fixed assets will have an effect on the company's profit and, consequently, on cash flow. This is because this investment, in modernization for example, may cause a reduction in production costs; or an investment in capacity expansion, which allows the company to increase sales and profits. What the manager often cannot visualize is the timing of this effect and, not infrequently, these investments cause the company's cash flow to be compromised in the short term. In this case, if there is no "breathing room" during this period, the company may encounter financial difficulties.Financing DecisionsFinancing decisions are those related to sources of funds both for operations and for investments, and they are related to two fundamental groups of accounts on the balance sheet: financing liabilities (third-party capital or interest-bearing liabilities) and shareholders' equity (own capital).We must make it very clear that when we speak of financing liabilities, we are referring primarily to liabilities assumed with banks (and, if applicable, assumed through the issuance of securities) and other alternative sources of financing, such as factoring companies, for example. Some of these liabilities are: loans, financing, guaranteed checking accounts, overdrafts, credit cards, discounting of trade notes or other credit instruments, etc.This analysis helps the manager reflect on issues such as: what is the level of commitment of my operating financial flow to third parties? how much of the profit can I take home? etc.When choosing between sources of capital, there are several aspects that the manager must take into account, for example: when choosing the option of raising funds from third parties (financing, for example), it is very common for the manager to be strongly concerned with the interest rate that will burden the result, but often the manager does not pay due attention to the term of the operation and, consequently, the amount of amortization that will commit cash flow over future periods, and this may lead the manager into a situation of critical financial difficulty.Exercises1) (CESPE / CEBRASPE - 2022 - ANP - Regulator of New Assignments II - Position 5) A company wants to measure the economic viability of a project for a new production plant. Considering this hypothetical situation, judge the following item.> The project will be considered viable if the sum of the project's future cash flows is sufficient to cover the initial investment.a) Correctb) Incorrect2) (IF-MS - 2019 - IF-MS - Technologist in Financial Management) Financial planning serves as a guide for the organization's activities, with the intention of achieving its short- and long-term objectives. Financial planning involves the cash budget and the projection of financial statements. For what purpose does the financial manager prepare the cash budget?A) To become aware of the company's operational needs and measures for raising long-term funds.B) To become aware of the company's financial needs and measures for raising short- and long-term funds.C) To become aware of cash deficits and measures for raising short-term funds.D) So that it can be used as a basis for developing financial statements.E) To determine cash surpluses for long-term investment.3) (IF-MS - 2019 - IF-MS - Technologist in Financial Management) In a feasibility analysis, we consider the operating cash flows that will be generated by the proposed project. Why are operating cash flows considered for the feasibility analysis of proposed investment projects?A) Because they measure the cash inflows generated by the project.B) Because they are financial data and, therefore, effective.C) Because they are accounting data.D) Because they demonstrate the additional profit to be obtained by implementing the proposal.E) Because they are relevant data.4) (CS-UFG - 2018 - SANEAGO - GO - Sanitation Analyst - Accountant) A certain commercial company presents the following indicators: average inventory turnover period: 80 days; average sales renewal period: 90 days; average payment period for purchases: 100 days. Based on these indicators, what is the company's operating cycle, in days?A) 100B) 170C) 180D) 1905) (CFC - 2015 - CFC - Bachelor's Degree in Accounting Sciences - 1st Exam) An industry buys raw material on credit. After receiving the raw material, the industry stores it, on average, for 7 (seven) days before sending it to the production area, where it will remain for 4 (four) days in process. After manufacturing is completed, the industry keeps the finished product in inventory for an average of 21 days before selling it. Sales are made with an average collection period of 35 days. Payment to the supplier is made 17 days after the purchase of the raw material.Regarding the situation above, the Financial Cycle is:A) 17 days.B) 29 days.C) 50 daysD) 56 days.6) (CETAP - 2011 - City Hall of Belém - PA - Administrative Assistant) The information provided in the statement of cash flows, if used with the disclosures and related information in the other financial statements, will help investors, creditors, and others assess: I- the business's ability to generate net cash flows; II- the enterprise's ability to pay dividends and financing; III- the reasons for the differences between cash flow and net income. Which is/are CORRECT:A) item I only.B) items I and II only.C) items II and III only.D) items I and III only.E) items I, II and III.7) (FUNDATEC - 2023 - IF-SC - Accountant) Regarding the transactions observed in a public sector entity during a certain period of fiscal year 2021, presented below, the transactions that must be recognized in the Cash Flow Statement as investing activities are:I. Cash receipts from claims and other policy benefits and cash payments of premiums, annuities, in transactions with an insurer.II. Cash receipts arising from taxes, fees, contributions, and fines.III. Cash receipts resulting from the sale of property, plant, and equipment, intangible assets, and other long-term assets.IV. Amortization of loans and financing that were taken out.Which are correct?A) I only.B) III only.C) I and II only.D) III and IV only.E) I, II, III, and IV.8) (IBADE - 2023 - Municipality of Rio Branco - AC - Accountant) Judge the sentences below as TRUE or FALSE.(__) The interpretation of the results of the statement of cash flows is essential for the development of social and financial policies, investment planning, and financial risk management.(__) Financing activities involve loans, raising funds, and acquisition of non-current assets.(__) The Statement of Cash Flows is composed of three main categories: managerial activities, advisory activities, and planning activities.The CORRECT sequence is:A) T, F, T.B) F, T, T.C) T, T, T.D) T, T, F.E) T, F, F.9) (FUNDATEC - 2023 - Municipality of Espumoso - RS - Accountant) Based on the Public Sector Accounting Standard that governs the Statement of Cash Flows, it can be concluded that “the acquisition of assets through the exchange of assets, through the direct assumption of the respective liability, or through finance leasing; and the conversion of debt with third parties into equity” are examples of:A) Cash flows on a net basis.B) Transactions that do not involve cash or cash equivalents.C) Cash flows from operating activities.D) Cash flows from financing activities.E) Cash flows from investing activities.10) (Avança SP - 2023 - Municipality of São Lourenço da Serra - SP - Treasurer) In the Public Sector Statement of Cash Flows, amounts whose collection comes from the sale of real estate belonging to the Public Administration will be classified as:A) Cash Flows from Investing Activities.B) Cash Flows from Capital Activities.C) Cash Flows from Operating Activities.D) Cash Flows from Financing Activities.E) Cash Flows from Extraordinary Activities.Answer Key1) B2) C3) B4) B5) C6) E7) B8) E9) B10) A
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