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I was solving a business case I had at school where i just needed to compute the cashflows (CF). Once I have done so I wanted to check that my calculations are all good by verifying that the following equation is true: CF(Operating) + CF(Investing) + CF(Financing) = Cash variation The issue is when I perform this calculation the sum of my cash flows gives me: Cash Variation + Net income

Now I got really confused and verified back all my calculations which seemed all correct (i mean i am simply applying the formulas as they are). So what I did is I started over from the Balance Sheet equation in order to better grasp the dynamics of all this in my head and there I got a surprise:

Balance sheet equation: Fixed Assets (FA) + Receivables(R) + Inventory (Inv) + Cash = Equity (Eq) + Debt-Long Term (DLT) + Debt-MidTerm(DMT) + Supplier (S)

Then by moving things around I get:

-(R + Inv - S) + FA + (Eq + DLT + DMT) = Cash

Given (R + Inv - S) = WCR and if I introduce the Deltas D with last year at this point the equation becomes:

-D(WCR) + D(FA) + D(Eq + DLT + DMT) = D(Cash)

=> -D(WCR) + CF(Investing) + CF(Financing) = D(Cash)

Now to get my operating cash flow I must compute: Net Income - D(WCR) so If I add the net income on the left it must add to the right so I get:

(Net Income + Deprec/Ammort) - D(WCR) + CF(Investing) + CF(Financing) = D(Cash) + (Net Income + Deprec/Ammort)

=> CF(Operating) + CF(Investing) + CF(Financing) = D(cash) + Net income + DAM

What am I doing wrong ? There must be something I am completely missing because mathematically the equation CF(Operating) + CF(Investing) + CF(Financing) = Cash variation cannot be possible

Thank you so so so much for any assistance

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  • $\begingroup$ Hint : For the Balance Sheet equation to hold, Profit & Loss is already incorporated in Equity. $\endgroup$ – Alecos Papadopoulos Jan 9 '17 at 16:54
  • $\begingroup$ God damn thanks so much man... you refer to Retained Earnings right ? So if I correctly follow your point, my Financial cashflow will contain my earnings (since it's the delta of the debt = Equity (+ retained earnings) + Long-term debt + trade-debt ? I actually did not add the earnings to the Equity before computing all this, I just took the equity as it is in the consecutive balance sheets $\endgroup$ – CoolStraw Jan 10 '17 at 7:32
  • $\begingroup$ Certainly, but not only. For example, in Liabilities except for Accounts Payable to Suppliers you may also have Dividends due and Income Tax Due (and both come from Net Income). So the whole calculation is a bit more complicated. $\endgroup$ – Alecos Papadopoulos Jan 10 '17 at 20:01

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