ANALYSIS AND ACCOUNTING OF TOTAL CASH FLOW

Annals of he Universiy of Peroşani, Economics, 12(1), 2012, 205-216 205 ANALYSIS AND ACCOUNTING OF TOTAL CASH FLOW MELANIA ELENA MICULEAC ABSTRACT: In order o reach he objecive of supplying some relevan informaion regarding he liquidiy inflows and ouflows during a financial exercise, he oal cash flow analysis mus include he analysis of resul cashable from operaion, of paymens and receips relaed o he invesmen and of financing decisions of he las exercise, as well as he analysis of reasury variaion (of cash iems). The managemen of oal cash flows ensures he correlaion of curren liquidness flows as consequence of receips wih he paymens flows, in order o provide paymen coninuiy of maure obligaions. KEY WORDS: oal cash flow; financing funcion; adequacy rae; reinvesmen rae; cash flow rae. JEL CLASSIFICATION: M 41 1. INTRODUCTION Cash flows are defined as he increase or decrease, during a financial exercise, of cash (available funds and sigh deposis) and cash equivalens (highly liquid shorerm financial invesmens). The analysis and accouning of oal cash flows aim he following procedures and objecives: To examine he cash flows from he presen operaing aciviies in order o decide if hey are posiive and o esablish he difference beween he operaing resul and he ne operaing flows. To compare he cash flows from he presen operaing aciviies o he paymens of dividends from he secions of financing aciviies in order o esablish if hese imporan ouflows of money are covered and hey do no represen a special effor for he company. Lecurer, Ph.D., Drăgan European Universiy of Lugoj, Romania, miculeacmelly@yahoo.com

206 Miculeac, M.E. To examine he invesmen aciviy, which has an imporan informaional value, in order o see if he company enlarges or no is aciviy and wha pars are aimed a enlargemen or conracion. On he basis of he invesmen aciviy analysis, i is examined he secion regarding he financing in order o analyse he way in which he company finances is enlargemen or if i does no enlarge, he way in which i reduces he debs relaed o financing. Finally, i is imporan o esablish he consequences of he nonmoneary invesmen and financing operaions on he cash flows. This kind of operaions do no involve effecive inflows or ouflows of financial means, bu hey refer o fixed asses, long-erm debs or equiy capials and may consis in replacing a fixed asse wih a long-erm deb or he paymen of a deb by capializaion issue (Lala Popa & Miculeac, 2012). 2. ANALYSIS OF CASH FLOWS RELATIVE TO THE OPERATING ACTIVITY Toal cash flows are made on he basis of he company s hree main aciviies: operaion, invesmen and financing. In order o build he ne cash flow generaed by he operaing aciviies, he inernaional pracice has defined wo mehods: he indirec mehod and he direc mehod, he difference beween he wo mehods consising in he way he flows relaed o he operaing aciviy are defined (Palepu e al., 2010). The indirec mehod which operaes, heoreically, wih informaion of engagemen accouning, consiss in adjusing he exercise s gross resul: - wih he expendiure and non-moneary revenues (amorizaions, provisions, exchange rae differences, posponed axes, un alloed profis of associae companies and minoriy ineress); - wih he variaion of socks and operaing debs, respecively wih he variaion of he need of ne circulaing funds (asse and liabiliy iems involving he posponing of cashing and paymens); - wih iems of revenues and expendiure which are aken ino consideraion when deermining he cash flows from he invesmen and financing aciviies (no o double he effecs). Through he indirec mehod, he cash flow relaed o he operaing aciviy is defined as i follows: Exercise s gross resul + Depreciaion expenses (amorizaions and provisions) - Depreciaion revenues (amorizaions and provisions) + Expenses regarding posponed axes - Expenses and revenues from exchange rae conversion and differences - Resul from he sale of fixed asses - Resul from he ransfer of invesmen securiies

Analysis and Accouning of Toal Cash Flow 207 - Revenues from subsidies for invesmens (calculaed) + Cashed ineress and dividends - Paid ineress and dividends - Exraordinary expenses and revenues no relaed o operaion - Variaion of socks - Variaion of debs + Variaion of suppliers and oher non financial shor-erm debs - Paymens regarding he ax on profi = Ne cash flow resuled from operaing aciviies Because he direc mehod operaes only wih receips and paymens-like informaion, he ne cash flow generaed by operaing aciviies will be calculaed as difference beween receips and paymens regisered during he period, refleced ino he available funds accoun. According o direc mehod, he cash flows relaed o operaing aciviies include: receips from cliens coming from he sale of goods, execuion of works and supply of services; paymens o suppliers of goods and services; paymens as wages and oher operaing aciviies o and in he name of employees; receips from royalies, commissions, fees and oher revenues; paymens regarding axes, duies and oher needs operaion-relaed; paid or cashed ineress and dividends; paymens or refunding of ax on profi, if hey canno be idenified specifically wih he invesmen or financing aciviies; paymens and receips regarding expenses, respecively exraordinary revenues operaion-relaed. Inernaional Financial Reporing Sandards reas differenly he financial flows resuled from ineress and dividends and heir classificaion ino one or anoher aciviy caegory. (Greuning e al., 2011) The ne operaing cash flow (FNE) can be me in one of he following wo siuaions: a) FNE > 0, a posiive operaing cash flow means ha he receips exceed he paymens relaed o he operaing aciviy and here will be an excess of liquidiy, which represens he source of value creaion from he main objec of aciviy. b) FNE < 0, a negaive operaing cash flow means ha he receips are exceeded by he paymens relaed o he operaing aciviy and here will be a lack of liquidiy. A series of operaing cash flow raes can be buil a in order o see if i fis he company s needs. 1. The operaing cash flow adequacy rae (RA FNE ) shows is capaciy o cover he cash needs resuled from he financing and invesmen aciviy (N FI ). There are wo possibiliies of calculaion:

208 Miculeac, M.E. a) For one financial exercise: FNE N RAFNE (1) FI If RA FNE > 1, hen during ha period he cash flows cover all he cash needs from he financing and invesmen aciviy, (including he repariion of dividends), a he end of ha period he company regisering an excess of cash above is needs. In his case new opporuniies mus be found o inves or place he money. The opimum level of he indicaor would be exacly 1, a deviaion of +10% being considered sill normal. Above i appears he problem of using he cash in excess. If RA FNE < 1, hen during ha period he cash flows do no cover all he cash needs from he financing and invesmen aciviy. In his case i mus find new sources of mobilizaion. I is a normal siuaion o launch on a marke. From his reason i is moniored for several years. b) For 5 consecuive years: RA FNE n 1 n 1 FNE N FI (2) This rae mus be necessarily bigger or equal o 1. The previous condiion is necessary bu no sufficien, because he elemens dynamics mus be moniored: If individual raes improve in ime, hen he indicaor is considered o reflec a favorable siuaion for he company. If raes worsen in ime, hen he indicaor is considered o reflec an unfavorable siuaion for he company. 2. The operaing cash flow reinvesmen rae (RR FNE ) shows how much of he operaing cash flow is reinvesed (INVT) during a financial exercise. FNEc RRFNE (3) INVT where: FNEc - operaing cash flow for period, correced wih he ax on profi and dividends (sums which are deduced); INVT - invesmens done in period, consising in fixed asses and equipmen wih addiional socks relaed o hem.

Analysis and Accouning of Toal Cash Flow 209 3. The operaing cash flow rae (R FNE ), shows is posiion in oal cash flows. If all cash flows are posiive, hen i shows he weigh in oal, having a meaning only when he oal cash flow and he operaion cash flow are posiive. RFNE and if FNE > 0, FNI > 0, FNF > 0 hen: FNE FNE (4) FN FNE FNI FNF FNE FNE % = FN (5) If R FNE > 1, hen i means ha he operaing aciviy is consumed by he oher aciviies, he aciviy wih he highes consumpion having o be idenified. If R FNE < 1 here are wo siuaions: - if all flows are posiive, hen he indicaor shows he weigh of operaion in oal, being advisable o be bigger hen 75%; - if all oal flows are posiive, bu here are negaive flows (from financing or invesmen), here mus be considered again wha generaes each flow. In order o avoid disorions and someimes he impossibiliy of calculaion, respecively o cach all he siuaions, i is advisable o analyze hem in absolue values on aciviies: FN=FNE+FNI+FNF (6) 3. CASH FLOW ANALYSIS RELATED TO THE INVESTMENT ACTIVITY The invesmen funcion measures he company s invesmen effor, a he level of inernal growh (buy or sale of corporeal and non-corporeal fixed asses), as well as a he level of exernal growh (financial fixed asses) ( Brealey e al., 2006). Cash flows generaed from invesmen aciviies (FNI) include: paymens regarding he acquisiion of fixed asses; receips coming from he sale of fixed asses; cashed ineress, as well as cashed dividends; debs variaions relaed o invesmen operaions; exraordinary revenues and expenses relaed o he invesmen aciviy. The ne cash flow from invesmen aciviies (FNI) can be found in he following siuaions: a) FNI > 0, case in which cash is generaed from he invesmen aciviies, cash which can be used o finance he oher aciviies. The siuaion is abnormal if heir size is considerable and i is no compensaed by invesmens. b) FNI < 0, case valid especially in he periods when here are made massive invesmens.

210 Miculeac, M.E. In his case we can build he cash flow rae from he invesmen aciviy (R FNI ) which shows is posiion in oal cash flows. If all cash flows are posiive, hen i shows he weigh in oal. I has a meaning only when he oal cash flow as well as he invesmen cash flow are posiive. RFNI and if FNE > 0, FNI > 0, FNF > 0, hen: FNI FNI (7) FN FNE FNI FNF FNI FNI % = FN (8) If R FNI > 1, hen i means ha he invesmen supplies cash which is consumed by he oher aciviies, he aciviy wih he highes consumpion having o be idenified, he siuaion being abnormal. If R FNI < 1, here are wo siuaions: - if all flows are posiive, hen he indicaor shows he weigh of he invesmen aciviy in oal, being advisable no o be bigger hen 25%; - if all oal flows are posiive, bu here are negaive flows (from operaion or financing), here mus be considered again wha effec generaes each flow. In order o cach all he possible siuaions, i is advisable o analyze hem in absolue values on aciviies. 4. CASH FLOW ANALYSIS RELATED TO THE FINANCING ACTIVITY The financing funcion emphasizes he financing sources o which he company applied in order o cover he fund needs (capial growh hrough conribuion in cash or loan conracing), as well as he cash ouflows relaed o geing hese sources (paymen of ineress and dividends). The cash flows generaed by he financing aciviies (FNF) refer o: receips from he issue of shares and oher insrumens of equiy capial; paymens o shareholders for buying or redempion of company s shares, ha is paymens regarding he reducion of issued capial; receips coming from loans from he issue of bonds, credi, morgage loan and oher shor or long-erm loans; paymens regarding he reimbursemen of loans and bonds regarding o operaions of financial leasing; paid dividends and ineress; variaion of debs referring o financing operaions; exraordinary revenues and expenses relaed o financing. The ne cash flow from financing aciviies (FNF) can be me in he following siuaions:

Analysis and Accouning of Toal Cash Flow 211 a) FNF > 0, case in which cash is generaed from he financing aciviies, cash which can be used o finance he oher aciviies. The siuaion is normal if i is done when here is an increase of equiy capial iems. Taking medium or long-erm loans is no abnormal, when hey connec wih he needs of cash from he invesmen aciviy, respecively hey benefi of he leverage effec. b) FNF < 0, case valid especially in he periods when credis are reimbursed, ineress and axes are paid massively, dividends are disribued. The siuaion is no necessarily negaive. A series of cash flow raes from he financing aciviy can be buil in order o see if i fis he company s needs. 1. The financing cash flow adequacy rae (RA FNF ) shows is capaciy o cover he needs resuled from he oher aciviies (N AC ). There are wo possibiliies of calculaion: a) For one financial exercise: FNF N RAFNF (9) AC If RA FNF > 1, hen during ha period he cash flows cover all he cash needs, including he repariion of dividends, a he end of he period he company regisering an excess of cash coming from his aciviy above is needs. In his case new opporuniies mus be found o inves or place he money. The opimum level of he indicaor would be exacly 1, a deviaion of +5% being considered sill normal. Above i appears he problem of sizing accordingly he resources compared o he needs. If RA FNF < 1, hen during ha period he cash flows do no cover all he cash needs from he financing and invesmen aciviy. In his case i mus find new sources of mobilizaion. I is a normal siuaion o launch on a marke. From his reason i is moniored for several years. b) I is calculaed for 5 consecuive years oo. This rae mus necessarily be bigger or equal o he uni. 2. The financing cash flow reinvesmen rae (RR FNF ) shows how much of he financing cash flow is reinvesed (INVT) during a financial exercise. FNFc RRFNF (10) INVT where: FNFc - financing cash flow for period, correced wih he ax on profi and dividends (sums which are deduced); INVT - invesmens done in period, consising in fixed asses and equipmen wih addiional socks relaed o hem.

212 Miculeac, M.E. 3. The financing cash flow rae (R FNF ), shows is posiion in oal cash flows. If all cash flows are posiive, hen i shows he weigh in oal. I has a meaning only when he oal cash flow and he financing cash flow are posiive RFNF and if FNE > 0, FNF > 0, FNI > 0, hen: FNF FNF (11) FN FNE FNI FNF FNF FNF% = FN (12) If R FNF > 1, hen i means ha he financing aciviy is consumed by he oher aciviies, he aciviy wih he highes consumpion having o be idenified. If R FNF < 1, here are wo siuaions: - if all flows are posiive, hen he indicaor shows he weigh of financing aciviy in oal, being advisable no o be bigger hen 25%; - if all oal flows are posiive, bu here are negaive flows (from operaion or invesmen), here mus be considered again wha generaes each flow. In order o avoid disorions and someimes he impossibiliy of calculaion, respecively o cach all he siuaions, i is advisable o analyze hem in absolue values on aciviies. 5. ANALYSIS END ACCOUNTING OF TOTAL CASH FLOWS We have previously menioned ha oal cash flows are formed on he basis of he hree aciviies: operaion, invesmen and financing. In some siuaions, here can be flows wih exraordinary feaure, which also mus be aken ino consideraion. They are no normal flows. They should no exis, bu because of some aleaory aciviies hey can inerfere and disor he cash flows. (Emery e al., 2004). Toal cash flows are formed on aciviies according o he following able: Table 1. Consiuion of oal cash flows according o direc mehod simplified scheme SPECIFICATION Receips relaed o he operaing aciviy Paymens relaed o he operaing aciviy CASH FLOW FROM THE OPERATING ACTIVITY Cash inflows relaed o he invesmen aciviy Cash ouflows relaed o he invesmen aciviy CASH FLOW FROM THE INVESTMENT ACTIVITY Cash inflows relaed o he financing aciviy Symbol and Formula Ie Ee FNE = Ie - Ee Ii Ei FNI = Ii - Ei If

Analysis and Accouning of Toal Cash Flow 213 Cash ouflows relaed o he financing aciviy CASH FLOW FROM THE FINANCING ACTIVITY Cash inflows relaed o exraordinary aciviies Cash ouflows relaed o exraordinary aciviies CASH FLOW FROM EXTRAORDINARY ACTIVITIES Toal cash inflows Toal cash ouflows Ef FNF = If - Ef Ix Ex FNX = Ix - Ex FI = Ie + Ii+ If + Ix FE = Ee + Ei+ Ef + Ex TOTAL CASH FLOW FN = FNE + FNI + FNF + FNX On he basis of cash flows he company s available funds are formed. There are wo siuaions: a) The company does no have reasury credis, and in his case he available funds a he end of he period (DBf) are given by he available funds from he beginning (DBi) o which he cash flow (FN) is added: herefore DBf = DBi + FI - FE = Dbi + FN (13) FN = DBf - DBi = DB (14) b) The company sars wih a reasury defici, ha is i has reasury credis (passive reasury TP). In his case, he available funds a he end of he period are given by he available funds from he beginning o which he cash flow is added: herefore DBf = DBi - TP + FI - FE = DBi + FN TP (15) FN - TP = DBf - DBi = DB (16) able: Available funds and reasury operaions are formed according o he following Table 2. Consiuion of available funds and reasury operaions SPECIFICATION Available funds a he beginning of he period Shor-erm bank credis a he beginning of he period Cash flow Curren bank credis a he end of he period Available funds a he end of he period SYMBOL and FORMULA DBi CBTSi FN = FNE + FNI + FNF + FNX CBTSf DBf = DBi + FN + CBTS

214 Miculeac, M.E. The cash flows are considered o be sufficien if hey generae available funds a he end of he period so ha he ne reasury is posiive. In my opinion, in order o make he analysis of oal cash flow, he following aspecs mus be aken ino consideraion: 1. The analysis of oal cash flow level; 2. The analysis of oal cash flow dynamics; 3. The analysis of oal cash flow srucure. 1. The analysis of oal cash flow level can be done on he basis of several crieria of comparison: The level of oal cash flow is adequae as long as: - i is posiive, he receips being bigger han he paymens (FN > 0; FI > FE); - i generaes more available funds a he end of he managemen period han a is beginning (DBf > DBi ; Db > 0); - i ensures a ne posiive reasury (TN > 0) and in growh ( TN > 0) ; - i covers he possible deficis of iniial reasury. The size of he cash flow may be a sign for he company s fuure needs. 2. The analysis of oal cash flow dynamics The condiions ha mus be obeyed in order o ensure a maximum efficiency are: a) FN > 0; FI > 0; FE < 0 I 1 ; I I b) FN FI FE 3. The analysis of oal cash flow srucure is done on consiuive iems, here being wo possibiliies: If all cash flows are posiive, by reporing each iem o he oal cash flow we ge is composiion: FNE FNI FNF FNX FNE FNI FNF FNX FN FN FN FN FN FNE% FNI% FNF% FNX % 100% (17) Operaing cash flows should have he majoriy, and he exraordinary ones should no exis. If no all cash flows are posiive, hen he srucure can be calculaed on consiuive iems: a) On ypes of inflows:

Analysis and Accouning of Toal Cash Flow 215 Ie Ii If Ix Ie Ii If FI FI FI FI Ie% Ii% If % Ix% 100% Ix FI (18) The flows from operaing and financing receips should have he majoriy, while he invesmen and exraordinary ones should no exis. b) On ypes of ouflows: Ee Ei Ef Ex Ee Ei Ef EI EI EI EI Ee% Ei% Ef % Ex% 100% Ex EI (19) I consider ha he flows from operaing and invesmen paymens should have he majoriy, hose from financing should be as lile as possible, while he exraordinary ones should no exis. 6. CONCLUSIONS The analysis of cash flows offers he possibiliy o esablish and ensure he level of cash flows and curren credis necessary o develop he operaing aciviy, while ensuring a durable and dynamic financial equilibrium, wih financing coss as reduced as possible. For his purpose, i anicipaes he value and periodiciy of receip and paymen flows, heir concordance wih he level of owned resources, araced or borrowed, compared o he esimaed operaing demands. The managemen of oal cash flows has he ask o offer useful informaion abou he change in commercial company s financial siuaion, allowing he evaluaion of heir capaciy o generae fuure cash flows wihin he operaing, invesmen and financing aciviies, as well as he adequae use of hese flows. We conclude ha he advanages of cash flows analysis are major: Informaion is necessary o esablish a company s capaciy o generae cash and cash equivalens on he hree caegories of aciviies: operaion, invesmen, financing (Lala-Popa & Miculeac, 2010 ) I increases he comparison degree of reporing he operaion resuls beween differen companies because i eliminaes he effecs of using differen accouning reamens for he same ransacions and evens. I gives he possibiliy o develop some valuaion and comparison models of he updaed value of fuure cash flows of differen companies. Possible fuure researches on his opic: analysis of cash flows from managemen operaions; analysis of cash flows from capial operaions; global analysis of cash flows using he profilograph mehod.

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