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Statement of Cash Flows

Statement of Cash Flows. CENTRAL FACT. Over long enough periods: NI = Cash from Ops. + Cash from Inv. = Free Cash Flows The difference is timing The goal of SCF is to explain the difference. Why do we care about cash?. Information on: Liquidity “Quality” of earnings

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Statement of Cash Flows

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  1. Statement of Cash Flows

  2. CENTRAL FACT Over long enough periods: NI = Cash from Ops. + Cash from Inv. = Free Cash Flows • The difference is timing • The goal of SCF is to explain the difference

  3. Why do we care about cash? • Information on: • Liquidity • “Quality” of earnings • “Free cash flows” for valuation • Problem: • interpretation is difficult and context specific • depends on the life-cycle of the company • it is hard to know what is a good cash flow

  4. Fundamental Relations Assets = Liabilities + Owners’ Equity Cash = Liabilities + OE - Noncash Assets Cash = Liab. + OE - Noncash Assets Cash = NI + Liab. + CC - Div. - NCA

  5. Formats Two formats for the operation section Financing and investing are always the same

  6. Miscellaneous Cash Flow Stuff • Why don’t lines on SCF tie to changes on B/S? • Foreign currency translation • subsidiaries are generally accounted for in local currency • in consolidation local currency is converted to dollars • changes in accounting balances that result from changes in currency are handled as a separate line item on SCF • changes in shareholders’ equity go to “other equity” on the balance sheet

  7. Example • Foreign sub with the following ‘96 and ‘97 ¥ B/S and the ¥ weakening from ¥100/$ to ¥111/$. ‘96 & ‘97‘96‘97 Cash ¥100 $1.0 $0.9 Inventory ¥200 $2.0 $1.8 Equity (100% owned) ¥300 $3.0 $2.7 • B/S--change in equity ($0.3) is “foreign currency translation adjustment” in shareholders’ equity • SCF--the change in cash ($0.1) is separate line item (not spread across change in inventory, etc)

  8. Acquisition Accounting • You buy a company with identifiable assets with a book value of $100 (fair value of $200) for $250. Identifiable Assets $200 Goodwill $50 Cash $250 Goodwill will appear as an intangible asset On the SCF, the only effect will be $250 as an investing use of cash, even though lots of other accounts change

  9. Major Noncash Transactions • Transactions not involving cash are not reported on the face of the statement • e.g., purchase PP&E for debt, acquire other companies for stock, swap assets • Disclosure is required • typically at the bottom of the SCF

  10. Other Items • Firms must disclose interest and taxes paid • income statement gives “accrual” amounts • cash interest & taxes are used in some analysis • generally disclosed at the bottom of SCF • sometimes disclosed in notes (e.g., Coke)

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