1 / 25

Session 19 Cash Flows, The Perfect Storm & Financial Statement Analysis

Learn essential techniques for analyzing cash flows, financial statements, and ratios to make informed business decisions. Explore tools like ratio analysis, trend analysis, and cash sufficiency ratio.

estrauss
Download Presentation

Session 19 Cash Flows, The Perfect Storm & Financial Statement Analysis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Session 19Cash Flows, The Perfect Storm & Financial Statement Analysis FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  2. Businesses are like Fruit Trees Fruit = Operating Activities Trunk & Branches = Investing Activities Roots = Financing Activities FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  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 - SPRING 2015

  4. Accounting’s Perfect Storm • IFRS Adoption • Convergence Completion • Including Financial Statement Reformating • Private Company Financial Reporting • PCC • FRF FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  5. Target Your Efforts • Solvency assurance • Wealth enhancement • Performance improvement FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  6. Start with the 3 P’s • Planning • Processing • Presenting FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  7. Include the Trifecta: Q-S-T • Q: Quantitative analysis • S: Strategic assessment • T: Tactical feasibility FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  8. 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 - SPRING 2015

  9. 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 - SPRING 2015

  10. Guidelines for a Presentation • Clarity • Accuracy • Simplicity • Visually friendly • Limit page content FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  11. 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 - SPRING 2015

  12. 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 - SPRING 2015

  13. 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 - SPRING 2015

  14. Cash Conversion Cycle • Cash conversion cycle • Days in payables ≥ DSO + Days in inventory FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  15. Typical Common Ratios • Solvency & liquidity • Earnings • Performance FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  16. Ratio Analysis • General guidelines: • Be consistent • Ascertain contents of numerator and denominator • Apply common sense… FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  17. Trend Analysis • Static analysis is virtually useless • Trend direction is key • Combine with other approaches FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  18. Common-size Analysis • Helpful for size discrepancies • Keyed to sales or total assets • Helpful for industry comparisons FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  19. Base Period Analysis • Combines trending and percentage analysis • Select representative base year and set the index at 100 • Measure subsequent periods in terms of the base year • Helpful for industry comparisons • Eliminates size bias FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  20. Comparative Analysis Cautions • Timing variances • GAAP variances • Conservative vs. Aggressive GAAP • Management attitude…”win at all cost!” • Size • Geographic venues FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  21. Horizontal and Vertical Analysis • The most basic…and most powerful analytical tool • Key element in fraud detection • Keeps the organization under control FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  22. Horizontal Analysis • Period versus period changes • Value changes • Percentage changes • Look for irregularities FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  23. Horizontal Analysis - Example FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  24. Vertical Analysis • Relationships within the same period: • Numerical relationships • Percentage relationships • Look for irregularities FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

  25. Vertical Analysis - Example FINANCIAL ACCOUNTING - BUS 020 - SPRING 2015

More Related