Cash Flow Statement

1. Cash Flow Statement

2. Cash Flow Statement Objectives for the Day 1. Explain purposes of CFS 2. Look at how to Construct a CFS 3. Learn more about info in CFS and other F/S 4. Evaluate a CFS

3. Cash Flow Statement Relatively Recent Some consider as important as Earnings Explains sources and uses of Cash and VERY LIQUID equivalents

4. Purposes of Cash Flow Statement • Provide info on co.’s • ability to generate • future cash flows • ability to meet its obligations • reasons for the difference • between income cash • - effect of investing & financing

5. Cash Flow Statement……. How do we construct a CFS?

6. Let’s go back to counting sheep…… Let’s go back in time to the simple accounting system of our sheepherders and look at their financials again…...

7. Direct Method of CFS Show Receipts and Disbursements in 3 Categories…. Operating Investing Financing….

8. DIRECT CFS - Isobel Sheep RE Births 138 138 Coat Sales 10 Paid Dad (60) Bought Land (40) Food expense (18)(18) 20 130

9. Indirect Method of CFS Start with Net Income Show adjustments to CA and CL - Operating Changes in NC Assets - Investing Changes in NC Liabilities and Equities - Financing….

10. Indirect Cash Flow - Isobel Operations Net Income 130 Sales not in cash (10) Cash from Ops 120 Investing - Land (40) Financing - Debt (60) Net change in Cash 20

11. Direct CFS - Deyonne Sheep RE Births 90 90 Paid Tyronne ( 3) Death of Ox ( 5) Food expense ( 7)( 7) 80 78

12. Indirect Cash Flow - Deyonne Operations Net Income 78 Loss not using Sheep 5 Cash from Ops 83 Investing - Financing - Debt ( 3) Net change in Cash 80

13. Cash Flow Statement - Operations 1. Start with NET INCOME 2. Adjust for transactions that affect income but NOT cash a) Look at current assets b) Look at current liabilities

14. Cash Flow -- Operations….. c. Depreciation d. Goodwill amortization (now not so critical) e. Gains/losses on sales f. Other

15. Cash Flow - Operations…….. 3. Look for items that affect cash but NOT income…. Other assets are substitutes for cash…as they increase cash goes down.

16. Cash Flow - Operations…….. This applies in various ways.. For Receivables… We have satisfied the conditions for recording revenue, but not received cash, so our cash is adjusted DOWN.

17. Cash Flow - Operations…. Some people memorize the rule that you add beginning balance and subtract ending balance for all Current Assets.

18. Cash Flow - Operations….. . A mnemonic -- IF we Owe more cash we OWN more cash. If we OWE less, we OWN less cash.

19. Cash Flow - Operations….. How about Gains and Losses on disposal? They affect income and Cash unequally. Remove gain or loss from Operating and show actual CASH paid or received in Investing section of CFS.

20. Cash Flow - Operations Depreciation and Amortization are added back to Net Income because while they reduce net income they do not reduce cash.

21. Cash Flow - Investing Here is where we show purchases and sales of long-term assets, e.g. P & E. Show the ENTIRE proceeds from sales or Show entire amount of CASH used to purchase….

22. Cash Flow - Financing Cash used to 1) pay off debts 2) pay dividends 3) buy treasury stock

23. Cash Flow - Financing Cash received from 1. Borrowing 2. Selling capital stock

24. Cash Flow Statement……. Next we will look at how to evaluateit…..

25. Cash Flow Statement -How to Read and Evaluate Look at Ratios Look at “Puzzle”

26. CFS -- Ratios……. 1. Net Income/Cash from Ops Usually .25 to 1, but rapid growth could lead to higher ratios.

27. CFS - Ratios…. 2. Investment Capital Expenditures/ Deprec. + Sales of Capital.. Is capital base expanding or shrinking? Ratios generally s/b greater than 1.

28. CFS - Ratios….. 3. Cash Flow Adequacy Cash from Ops/ LT Purchase + Divs + LT Debt Paid Does the co. generate sufficient cash to pay debts, shareholders, and to buy new capital?

29. CFS - Ratios….. 4. Cash Sources -- Common Size Statement… Use all cash sources as 100% and then get each source as a % of that. Look for trends.

30. CFS - Ratios…. 5. Dividend Payout Ratio Cash Dividends Paid/ Cash from Ops Like most things…rewarding owners is good, but only if company does not incur large opportunity costs.

31. CASH FLOW PUZZLE

32. CASH FLOW PUZZLE It’s Greek to me…..

33. CFS - “Puzzle” - Step One Scanning the Big Picture a) consider company life-cycle b) company’s results c) net income d) unusual itemson I/S?

34. CFS - “Puzzle” Step Two Cash Flow Engine a) Cash from Ops + or --? b) Growing or shrinking? c) Age of company? d) Are c.a. and c. l. both +? e) Covers depreciation? f) Covers dividends? g) Keeps company whole?

35. CFS - “Puzzle” Step Three…. Pinpoint Good and the Bad a) Look at Investing section… is co. replacing its old assets? S/b greater than depreciation at least. Is growth steady?

36. CFS - “Puzzle”…..Step Three b) Look at Financing section Look at borrowing and repayment and look fortrends. Is company near its debt limit?

37. CFS - “Puzzle”…..Step Three b) Look at Financing section Look at stock activity -- any buyback? Is company able to pay dividends consistently?

38. CFS - “Puzzle” Step Four • Pull it all together • 1. Any unusual items you saw? • Combine the results of • first three steps….

39. CASH FLOW PUZZLE

40. The Four “Greats”Look at carefully…...

41. CFS - Other uses Given primacy of cash flow as a determinant of success, companies create Pro Forma cash statements. If you want to justify an investment, you will be asked to predict cash flows…...

42. CFS - Other uses Some analysts consider cash flow per share as important as EPS. Cash Flow is used a great deal in valuing firms and in finance. Ultimately, most decisions hinge on long-term cash returns……..

43. Cash is Royalty!!!!

44. For next week….. • Read chapter 7 • Do homework • For problem 5.13 prepare • common size financials • Be sure to do Cumulative • Return problem. • 5. Have Project #1 drafted.