The Cash Flow Statement

1. The Cash Flow Statement Crow River Investment Club June 10, 2003

2. References • The Motley Fool Investment Workbook • A Cash Flow Statement (Lowe’s) • www.investorwords.com

3. Agenda • Purpose • Terms • Analysis

4. Purpose • Indicator of financial health of company • Considered by some experts to be a better measure than earnings • Shows the directional flow of money • Where it comes from • Where it goes

5. Basic Overview • Net income • Add Depreciation • Subtract non-cash assets • Add current liabilities that haven’t been paid • Result -> an understanding of cash flow

6. Basic Terms • Net income • From the income statement • Depreciation • Loss of value of previous purchase • Accounts receivable • What is still owed to the company • Remember -> an increase may mean the company isn’t effectively collecting for its product • Inventory • What the company still owns • Increasing inventory means the company is producing faster than it’s selling • Cash Provided by Operations • Should be positive and rising • If negative, indicates company cannot fund growth from internal means

7. Basic Analysis • Free Cash Flow • (Cash Provided by Operations) – (Dividends Paid) – (PP&E) • Measure the means a company has to increase shareholder value • Stock re-purchase • Debt reduction • Acquisition

8. CF Example - LOW Cash Flows from Operating Activities: FY02 FY01 Net Earnings $1471 $1023 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: Depreciation and Amortization 645 534 Deferred Income Taxes 208 42 Loss on Disposition/Writedown of Assets 18 39 Tax Effect of Stock Options Exercised 29 35 Changes in Operating Assets and Liabilities: Accounts Receivable – Net (6) (5) Merchandise Inventory (357) (326) Other Operating Assets (41) (37) Accounts Payable 228 1 Employee Retirement Plans 40 114 Other Operating Liabilities 461 193 Net Cash Provided by Operating Activities 2696 1613

9. Additional Notes • Cash Flows from Investing Activities • Shows how company spends cash • Cash Flows from Financing Activities • Shows impact of debt reduction or issue • Shows cost of dividend payments • Cash and Cash Equivalents • Reflects same line on balance sheet

10. Free Cash Flow • Free Cash Flow • (Cash Provided by Operations) – (Dividends Paid) – (PP&E) • 2696 – 66 – 2362 • $268 Million in FY02

11. Next Month: Bringing it all together - Lynn