Appunti di Environmental accounting

CASH FLOW FROM OPERATING ACTIVITIES

Cash inflows/outflows directly related to earnings from daily operations. This part is related to revenues and expenses of the income statement and to the part of the balance sheet related to the commercial cycle (short term assets, accounts receivable, inventories, short term liabilities i.e. account payables, accrual elements etc).

There are two alternative methods for presenting the operating activities section:

A. DIRECT METHOD reports the components of cash flow from operating activities as gross receipts and gross payments:

• INFLOWS ($ received for)
  • costumers purchase of services and goods for resale
  • dividends (from other investments!) and salaries & wages
  • interests on investments (this are the gains on the purchase of marketable securities)
• OUTFLOWS ($ paid for)
  • income taxes
  • interest on liabilities

The difference between inflows and outflows is called net cash inflow (outflow) from operating activities.

B. INDIRECT METHOD starts with net income from

the income statement and eliminates the noncash items (like depreciation, amortization) and the changes in current assets and liabilities. NB: Marketable securities are not included in operating activities!! We will arrive at a net cash inflow (outflow) → 2. CASH FLOW FROM INVESTING ACTIVITIES Cash inflows/outflows from acquisitions or sale of long-term assets (tangible and intangible) and investments in the securities of other companies. It is related to the long-term asset part of the balance sheet (acquisition or sales): INFLOWS ($ received for) OUTFLOWS ($ paid for) - Sale or disposal of property, plant, equipment - Purchase of property, plant, equipment - Sale or maturity of investment securities - Purchase of investment in securities (purchasing or selling securities on the market) → 3. FINANCING ACTIVITIES Inflows/outflows related to external or internal sources of financing (issuance of new stock, repurchase of new stock, issuance of corporate bonds, repayment ofbank loans, notes, mortgages, bonds, etc.) Basically, it includes exchanges of cash with creditors and owners.

INFLOWS ($ received for)

• borrowings or notes, mortgages, bonds, etc.
• repayment of principal from creditors (excluding interest, which is operating activity!)
• issuing stock to owners
• dividends to owners

We have to divide the cash flow statement into these three main elements. Also, when we have to evaluate the profitability of new projects, we have to think about the inflows/outflows of cash over a certain period of time and provide expectations of the in/out related to these three main parts. Then, apply a rate of return to discount these cash flows over a certain period of time and compare the net present value of these alternatives to understand the profitability of each investment. The consolidated statement of cash flow (the cash flow of several companies owned by a bigger one) is divided into different parts. In the first one, there's the cash flow from.operating activities.To present the operating activities section, in this case we use the indirect method and we start with the accrual net income and converts it to cash flow from operating activities by adjusting the net(depreciationincome to the non-cash elements from income statement and balance sheet part andamortizations that are virtual expenses by the accrual principle which amounts are spread over thetime apart from land!).Then we +/- back changes in assetsand liabilities i.e. we subtract theamount of accounts receivable (thismeans accounts receivable areincreasing and we immobilize cashin this account receivables); samewith inventories (we are not sellingitems and not collecting cash); if weadd accounts payables we have anincrease of this account and we havea positive effect on the monetary part(we are waiting to pay money to oursuppliers, not paying yet). Then wecalculate the net cash provided bythe operating activities (if positivethe company is profitable).NB: the cash

Flows from operating activities are always the same, regardless of whether the direct or indirect method is used!

The second part of the consolidated cash flow is related to the cash flow from investing activities: we report all the purchases of tangible assets (outflows of money), then we report all the inflows of cash from the disposal of assets, the purchase of short-term investment (outflows) related to the purchase of marketable securities.

NB: Marketable securities are not commercial assets related to the operating cycle!!! BUT they are related to the investing activities (investing money in a profitable asset i.e. shares, bonds, securities, etc)! This is a current asset NOT to own the company (otherwise they would be long-term assets, financial) but is only for speculative purposes.

Then we calculate the net cash used by investing activities:

• A negative value means that the company is able to use cash to purchase long-term assets or to expand the business in purchasing new economic resources.

Per migliorare l'attività produttiva:

• Un valore positivo significa che stiamo vendendo asset e potrebbe essere un segnale che l'azienda sta vendendo per ottenere liquidità. Questo è un segnale NEGATIVO, a meno che non stiamo cambiando completamente la nostra strategia e sostituendo i nostri asset e affittandoli per essere più flessibili!

La terza parte del flusso di cassa consolidato è il flusso di cassa dalle attività di finanziamento e coinvolge la parte patrimoniale del bilancio e i debiti a lungo termine! Abbiamo il rimborso del capitale sui debiti a lungo termine (rimborso dei prestiti alle banche o istituti finanziari); emissione di debiti a lungo termine/obbligazioni societarie (entrate); riacquisto di azioni (uscite di denaro); proventi dall'emissione di azioni (stiamo vendendo azioni sul mercato se gli azionisti le acquistano abbiamo un'entrata); pagamento di dividendi in contanti. Se l'importo totale delle attività di finanziamento ha un segno negativo, significa che stiamo pagando gli azionisti o rimborsando debiti (potrebbe essere un buon segnale poiché l'azienda è in grado di rimborsare i suoi azionisti e tutti i principali

actors like banks, financial institutions, ecc).

Note: depending on which standard we are using, we can report interest as operating activities(GAAP) or as financing activities (IFRS).

The last part of the consolidated cash flow is dedicated to the net increase of cash in cashequivalents: we know the beginning value, we subtract the value at the end of year and we obtainthe ending value. NB: the ending cash balance should be equal to cash in the balance sheet!!

The net increase/decrease in cash is the combination of the net cash from the different activities. Itis the same if we calculate the changes in balance sheet (beginning value of cash and cash equivalent/ ending value) changes must be the same!

In order to prepare the statement of cash flow we need:

1. comparative balance sheets used in calculating the cash flows from all activities;
2. complete income statement used to calculate cash flow from operating activities;
3. additional details concerning selected accounts (especially

For financing and investing activities, we need to know the amount of all the operations related to these two activities). Our approach to prepare and understand the cash flow statement focuses on the changes in the balance sheet: cash = liabilities + SE – noncash assets (coming from A= L+SE). All the statements are strictly related! A change in one can provoke a change in another one. In order to calculate the changes in balance sheet we need to take into consideration two years (this part is related to the operating activities, to investing activities and financing activities). Note: changes in inventory are both reported in income statement as revenues and in the cash flow statement as operating activities (indirect method) if we’re analyzing statement with IFRS we cannot duplicate effect of changes of inventory (if we +/- of inventories from the balance sheet we cannot do that in the income statement). Prepaid expenses are virtual accounts due to accrual principle (if it is

positive we subtract it when calculating the cash flow from operating activities). Starting from the balance sheet and calculating all the differences between two years we can calculate all the effects on the cash flow from operating/investing/financing. When analyzing the cash flows of small and medium company the only way is to use the indirect method starting from the balance sheet and the net income, analyzing all the changes and reporting them in the correct part of a cash flow statement. The indirect method adjusts the net income by adding/subtracting back all the noncash items (i.e. depreciation and amortization), adding (+) losses and subtracting (-) gains, +/- changes in current assets and liabilities. The cash received from sale or disposal of long-term assets is classified as an investing cash inflow, while gains/losses on the income statement are subtracted/added to net income in order to compute cash flow from operating activities. Gains must be subtracted from net income to avoid

double counting. Losses must be added to net income to avoid double counting them.

Interpreting cash flow from operating, investing and financing activities

What are operating assets/liabilities? Are those assets and liabilities that are related to the day to day operations (current assets/liabilities BUT in current assets we have several elements)

NB: marketable securities are not related to operating assets!!

Which is the best way to calculate the cash flow from operating activities?

Generally, is the indirect one for external purposes BUT for internal purposes the best one is the direct one since we can control all the financial transaction of the company. If we don't use an internal unit to keep track of all this movements we can calculate the statement BUT only when we disclose the income statement and the balance sheet (end of accounting period) and during the period we don't know what the situation is (trace of all the financial transaction occurred during an accounting

ties). The working capital is a measure of a company's short-term liquidity and its ability to meet its current obligations. A positive working capital indicates that a company has enough current assets to cover its current liabilities, while a negative working capital indicates that a company may have difficulty meeting its short-term obligations. The cash flow from operating activities is an important indicator of a company's financial health. It shows how much cash a company generates from its core operations, excluding any cash flows from investing or financing activities. Positive cash flow from operating activities indicates that a company is generating enough cash to support its operations and potentially invest in growth opportunities. Negative cash flow from operating activities may indicate that a company is not generating enough cash from its operations and may need to rely on external financing or reduce its operating expenses. Analyzing the cash flow from operating activities can provide insights into a company's profitability, efficiency, and sustainability. It can help investors and analysts evaluate a company's ability to generate consistent cash flows and assess its ability to meet its financial obligations. Additionally, comparing the cash flow from operating activities of different companies within the same industry can provide insights into their relative performance and financial stability. In conclusion, the cash flow from operating activities is a key component of a company's financial statements. It provides valuable information about a company's ability to generate cash from its core operations and is an important indicator of its financial health and sustainability.