Question

The cash flow statement below is extracted from a company.

Cash Flow Statement
	12/25/2020 (Dh ’000)	12/27/2019 (Dh ’000)	12/28/2018 (Dh ’000)
Cash from operations
Net income	8,706	7,025	18,434
Depreciation & amortization	18,663	16,131	12,672
Net increase (decrease) in assets & liabilities	6,696	26,659	10,623
Other adjustments, net	1,396	924	3,996
Net cash provided by (used in) operations	35,461	50,739	45,725
Cash from investments
(Increase) decrease in property & plant	-28,784	-34,265	-34,734
Other cash inflow (outflow)	-35,434	-1,143	-2,454
Net cash provided by (used in) investing	-64,218	-35,408	-37,188
Cash from financing
Issuances (purchases) of equity shares	3,142	870	7,800
Increase (decrease) in borrowings	-1,706	-1,648	-1,755
Net cash provided by (used in) financing	1,436	-778	6,045
Net change cash & cash equivalents	-27,321	14,553	14,582
Cash and cash equivalents at start of year	59,287	44,734	30,152
Cash and cash equivalents at year end	31,966	59,287	44,734

Required:

Using your own words, discuss the following relationships

a) between net income, working capital from operations, and cash flow from operations for the three years, and

b) between cash flows from operating, investing, and financing activities for the three years.

Answer 1

a) The net income is the income from income statement based on accrual concept. To convert it into cash basis non cash expenses like depreciation and amortisation is added back. The non cash expenses and gains like loss on sale of assets and gain on sale of assets and investments are also adjusted before adjusting the working capital movements. The working capital movements are adjusted to arrive at cash flow from operating activities. Increase in current assets decreases the cash inflow and decrease in current assets increases the cash inflow. Increase in current liabilities increases the cash inflow and decrease in current liabilities decreases the cash inflow. The cash flow from operations is one of the main indicators of a firm’s operational performance. The higher the cash flow from operations it is better for the firm. In the given case there has been cash inflow from working capital movements for all 3 years consistently. In 2020 though the cash inflow from working capital has reduced.

b) The cash flow from operating activities is a main source of cash flow for investing activities and financing activities. The investing activities refers the to the purchase of fixed assets for generating revenue and operational requirements. The financing activities refer to the borrowing and repayment of loans, issue and repurchase of common stock, payment of dividend to shareholders. In the given case there has been high investments in investing activities and cash flow from operating activities are not enough to fund the same in year 2020. Shares have been issued during the period and borrowings are repaid for all 3 years.