Common-Size Analysis of the Statement of Cash Flows

Consider the following information from a direct method cash flow statement: | Account | Amount (USD) | |----------------------------|--------| | Cash receipts from customers | 125,000 | | Cash paid to suppliers | 90,000 | | Cash paid for interest | 3,000 | | Net revenue | 263,000 | | Total cash inflows | 380,000 | | Total cash outflows | 168,000 | Using the above information, what percentage of cash outflows is the cash paid to suppliers?

Incorrect. Remember, it is a cash payment.

Correct. To calculate the cash paid to suppliers in a common-size statement, divide the USD 90,000 paid to suppliers by the total cash outflow of USD 168,000 to come up with 53.6%.

Incorrect. Remember, each line item is treated separately with the direct method.

If the same company used the indirect method, what percentage would be assigned for total operating activities?

Correct.

Incorrect. 19.0% is not the correct answer.

Incorrect. 15.1% is not the correct answer.

The second approach to the common-size statement of cash flows is to express each item as a percentage of net revenue. Inflows of cash will be a positive percentage of revenue, and outflows will be a negative percentage of net revenue. Using this approach, each line item is expressed separately. Using the previous information: | Account | Amount (USD) | |----------------------------|--------| | Cash receipts from customers | 125,000 | | Cash paid to suppliers | 90,000 | | Cash paid for interest | 3,000 | | Net revenue | 263,000 | | Total cash inflows | 380,000 | | Total cash outflows | 168,000 | What percentage would be assigned to the cash paid for interest?

Incorrect. Remember, this is the net revenue approach.

Incorrect. Remember, this is an outflow of cash.

Correct.

Why is this approach most useful for analysts?

Incorrect. The analyst can see how each item compares to other cash flow items, but the real benefit is that it allows analysts to predict future cash flows for each item in the cash flow statement based on budgeted revenue.

Correct.

The common-size format shows trends in cash flows instead of looking at total amounts. With the net revenue approach, analysts can predict future cash flows of items that do not seem to relate to revenue.

To summarize: [[summary]]

With the __common-size analysis of the statement of cash flows__, there are two approaches. In the first approach, each line item of cash inflow is expressed as a percentage of total cash inflow, while for each cash outflow, each line item is expressed as a percentage of total cash outflow. In this first approach, there is a difference in total inflows and outflows depending on how the cash flow statement was prepared. When the direct method is used to prepare the statement, each line of operating activities is separately presented as a percent of total cash inflows (outflows). When the indirect method is used, the net operating inflow or outflow is used to calculate the percentage of the total inflows (outflows).

Since there is a net inflow of cash from operations ($$125{,}000 - 90{,}000 - 3{,}000$$), divide that by the total cash inflow of USD 380,000 to come up with 8.4%.

Using the net revenue approach, the cash paid for interest which is an outflow would be divided by net revenue, making the answer -1.1%.

23.9%

53.6%

55.3%

8.4%

19.0%

15.1%

1.9%

1.1%

-1.1%

Allows analysts to see how each cash flow item relates to all other cash flow items

Allows analysts to predict future cash flows for each item in the cash flow statement based on budgeted revenue

Continue

Continue

Continue

Continue

Continue