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Session 21 Statement of Cash Flows

Session 21 Statement of Cash Flows. Businesses are like Fruit Trees. Fruit = Operating Activities. Trunk & Branches = Investing Activities. Roots = Financing Activities. Statement of Cash Flows. Operating Working capital, day-to-day transactions Direct versus indirect methods Investing

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Session 21 Statement of Cash Flows

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  1. Session 21Statement of Cash Flows FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  2. Businesses are like Fruit Trees Fruit = Operating Activities Trunk & Branches = Investing Activities Roots = Financing Activities FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  3. Statement of Cash Flows • Operating • Working capital, day-to-day transactions • Direct versus indirect methods • Investing • Non-current assets—mainly PP&E and marketable securities • Financing • Debt, equity and dividends paid FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  4. Target Your Efforts • Solvency assurance • Wealth enhancement • Performance improvement FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  5. Start with the 3 P’s • Planning • Processing • Presenting FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  6. Include the Trifecta: Q-S-T • Q: Quantitative analysis • S: Strategic assessment • T: Tactical feasibility FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  7. Tools for Financial Statement Analysis • Ratio analysis • Trend analysis • Common-size analysis • Base period analysis • Comparative analysis • Horizontal and vertical analyses FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  8. A Financial Statement Approach • Look for key relationships • Focus on spending drivers • Don’t overlook the Statement of Cash Flows • Remember to measure trends • Tell a story FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  9. Guidelines for a Presentation • Clarity • Accuracy • Simplicity • Visually friendly • Limit page content FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  10. Cash Flow Red-Flags • Receivable and inventory growth rate exceeds sales growth rate • Payables growth rate exceeds inventory growth rate • Current liabilities grow faster than sales • Sustained operating losses (negative net income) FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  11. Cash Flow Red-Flags (cont’d) • Negative operating cash flow • Capital expenditures exceed operating cash flow • Sustained capital expenditures reductions • Sustained sales of marketable securities in excess of purchases • Substantial shift from long to short term borrowing • Dividend reduction or elimination FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  12. Cash Sufficiency Ratio • Cash Flow From Operations + Interest + TaxesPPE + Debt Servicing + Taxes + Dividends • Should be greater than 1 • Can easily disaggregate • Different footprints for different development stages FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

  13. Cash Conversion Cycle • Cash conversion cycle • Days in payables ≥ DSO + Days in inventory FINANCIAL ACCOUNTING - BUS 020 - FALL 2014

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