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Statement of Cash Flows

Course video 4 of 17

In this module, you will apply your learning on financial valuation of IT projects and understand the limitations of such valuation.

Capstone Project: Business Technology Management

Escuela de Negocios de la India

Curso 6 de 6 en Gestión de tecnología empresarial Programa Especializado

The Capstone Project places you in the shoes of a CIO of a hypothetical FMCG firm, Indus Consumer Products Limited, who is required to select a portfolio of IT investments for the decision year that is aligned with the business strategy and objectives of the firm. Different business units in the company have proposed different applications to implement. Your job as CIO will be to analyze the business case for each of the projects and identify those that best serve the long-term business strategy and objectives of the firm. Your choice of IT investments is constrained by the IT budget for the given financial year. The case consists of the following artifacts: - Letter from the CEO - Company Report - IT Assessment Report - Proposal for the SCM Initiative - Proposal for Rural Connect - Proposal for the new ERP System The case is designed to provide a Capstone experience on many of the concepts and frameworks learned in the specialization. Learners need to: (a) Identify a broad business focus of the company using the competitor data. Provide a couple of lines on the strategic pain points for the firm. (b) Which one of the five applications must the company invest in? Why? Provide strategic and financial reasons in support. (c) Thoroughly analyse past projects to remove redundant or unviable investments. (d) Identify and propose strategies for managing risk associated with large scale IT investments. (e) Create an organizational structure and communication plan that will engage various stakeholders of the organization.

Impartido por:

M Rammohan Rao
Professor Emeritus
Ramnarayan Subramaniam
Clinical Professor
Deepa Mani
Associate Professor and Executive Director, Srini Raju Centre for IT and the Networked Economy
Sudhir Voleti
Assistant Professor and ISB Research Fellow
Ramabhadran Thirumalai
Assistant Professor

Transcripción

In this video, we will start discussing the statement of cash flows.

We will start by discussing the need for

it and how it is different from the income statement.

We will list the three main parts of the statement of cash flows.

We will also discuss how to calculate cash flows from operating activities,

which is the first part of the statement of cash flows.

The balance sheet tracks the change in

a company's cash balance from one year to the next.

However, it does not tell us why the cash balance changes.

For example, Amazon had

cash and cash equivalents worth 14.58 billion dollars at the end of

2014 and cash and cash equivalents worth 15.89 billion at the end of 2015.

What caused the increase of 1.31 billion dollars in Amazon's cash and cash equivalents?

The income statement does not track changes to cash,

as everything is recorded on an accrual basis.

Remember, accrual basis means a transaction is

recorded on the income statement as soon as an economic event occurs,

regardless of when the cash from

this economic event is actually received or paid by the company.

Profits or net income cannot pay a company's bills,

because it does not represent cash.

To that end, the income statement is not very helpful

in tracking why cash and cash equivalents change every year.

The statement of cash flows reports the different channels

through which changes in cash during the year may be attributed to.

This helps in determining the ability of

a company to pay its suppliers, pay its employees,

make interest and dividend payments,

repay loans, buy PP and D needed for expansion, et cetera.

The statement of cash flow separates the change in cash and cash equivalents

from the beginning to the end of the year into three categories;

namely cash flows from operating activities,

cash flows from investing activities and cash flows from financing activities.

Cash flows from operating activities are those related to

the company's operations-related current assets and current liabilities.

Cash flows from investing activities are

those related to the company's non-current assets.

Cash flows from financing activities are those related to

the company's non-current liabilities and shareholder's equity.

Let us first focus on determining the cash flows from operating activities.

There are two ways to do this;

one is through the direct method and the other is through the indirect method.

Under the direct method of calculating cash flows from operations,

cash inflows and outflows are directly reported.

This method is simple and easy to understand.

However, it is very costly for companies to maintain this method,

as they have to maintain very detailed cash records.

Under the indirect method of calculating cash flows from operating activities,

adjustments to net income are made to reflect only cash receipts and disbursements.

This is because net income is calculated following

accrual principles and not on cash basis.

The adjustments to net income typically fall into two categories.

One is adjusting for items that affect net income, but not cash.

Example of such items are depreciation and amortization expenses and credit sales.

These are recognized on the income statement,

though no cash has been paid or received for these.

The second adjustment is for items that affect cash,

but not net income.

An example of this is raw materials and supplies that a company has purchased with cash,

but has not sold as yet.

This is not reflected on the income statement until the inventory is sold,

but the cash paid to buy it is not recognized on the income statement.

In this course, we will use an indirect method

of determining cash flows from operating activities,

as companies use this when they report

their statement of cash flows in their annual report.

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