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FINANCE IN A CANADIAN
SETTING
Sixth Canadian Edition
Lusztig, Cleary, Schwab
CHAPTER FOUR
Funds-Flow Analysis and
Financial Forecasting
Learning Objectives
1. Recognize why statements of changes in
financial position are important.
2. Describe the two ways of preparing
statements of changes in financial position.
3. Explain what an increase or decrease in funds
means in a statement of sources and uses of
funds.
4. Discuss how an activity format evaluates a
firm’s cash flow.
5. Describe how pro forma statements are used
as planning tools.
Introduction

1.
-
2.
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Two methods of assessing business
performance are discussed
Statement of changes in financial position
(SCFP)
Provide insight into where a firm’s funds
have been used and come from
Pro forma financial statements
Assists management in forecasting a firm’s
future financial position
Statement of Changes in
Financial Position
The two methods of reporting SCFP are:
Sources and Uses of Funds:
compares the balance sheets of a company
at two different times
Recognizes all changes in balance sheet
accounts
Any  in asset accounts or  liability
accounts represent a use of funds
Source of funds assets  liabilities 
Use of funds  assets  liabilities 

Statement of Changes in
Financial Position
Funds-Flow Based on Activity:
Categorizes the flow of funds according to
major activities including cash flow,
financing and investments
Useful in analyzing a firm liquidity
The 3 functional areas include:
1. Operations
2. Long-term financing
3. Investments
Pro Forma Financial
Statements
Used in projecting future balance sheets
and income statements
 Several different techniques exist in
forecasting accounts such as:
- sophisticated estimation techniques
- historical projections
 Tedious to construct due to future
uncertainties

Pro Forma Financial
Statements

Preparation begins with forecasting
revenues by marketing personnel by
using a(n):
- Internal approach
- External approach
- Combination of both
Pro Forma Financial
Statements

From the revenue forecast, other
related items in financial statements
can be determined based on historical
proportions of sales such as:
- Cost of good sold (COGS)
- Inventory
- Accounts receivable
Summary
1. Statements of changes in financial position
can be prepared using either a source and
uses format or an activity format, with both
providing essentially equivalent information.
2. A statement of sources and uses of funds is
derived by comparing the balance sheet of a
firm at two different points in time. It
provides information about a firm’s
investment over the period under
consideration and how such investments were
financed.
Summary
3. An activity format summarizes the various
flows of funds in terms of their effect on the
firm’s cash position over a given time period.
The resulting funds-flow statement, which is
widely used by creditors, is particularly useful
in highlighting the firm’s liquidity position.
4. Any increase in an asset or decrease in a
liability represents a use of funds. Similarly,
any decrease in an asset or liability
represents a source of funds.
Summary
5. Projected financial statements, also called pro
forma statements, can be used as planning
tools. In projecting financial statements, the
forecast of sales or revenues is the basic
forecast from which most other entries are
derived.