1 / 31

Cash Flow Analysis Lindsay Dastrup

Cash Flow Analysis Lindsay Dastrup. Overview. Direct method Indirect method Cash flow patterns Cash flow ratios Free cash flow. Categories of Cash Flow. Operating Activities transactions that affect the determination of net income Investing Activities

keith
Download Presentation

Cash Flow Analysis Lindsay Dastrup

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. Cash Flow Analysis Lindsay Dastrup

  2. Overview • Direct method • Indirect method • Cash flow patterns • Cash flow ratios • Free cash flow

  3. Categories of Cash Flow • Operating Activities • transactions that affect the determination of net income • Investing Activities • sale and purchase of property, buildings, and equipment • Financing Activities • transactions whereby cash is obtained from or repaid to owners

  4. Direct method the reporting of the cash received or disbursed of each income statement item Indirect method the adjustment of the net income for items that do not affect cash flow Cash Flow from Operations TWO METHODS

  5. Orchard Blossom Company

  6. Direct Method Sales and cash collected from customers Beginning accounts receivables $ 40 +sales 150 =cash available for collection $ 190 -ending accounts receivable60 =cash collected from customers $ 130

  7. Direct Method Cost of goods sold and cash paid for inventory Ending inventory $ 75 +cost of goods sold80 =required inventory $ 155 -beginning inventory100 =inventory purchased $ 55

  8. Direct Method Wages expense and cash paid for wages Beginning wages payable $ 7 +wage expense25 =total wages payable $ 32 -ending wages payable10 =cash paid for wages $ 22

  9. Cash from Operating Activities: Direct Method Cash collected from customers $ 130 Cash paid for inventory -55 Cash paid for wages -22 Cash paid for depreciation 0 Net cash from operating activities $ 53

  10. Indirect method Net income $ 15 +depreciation 30 -increase in accounts receivables -20 +decrease in inventory 25 +increase in wages payable3 = net cash from operating activities $ 53

  11. Cash from Investing Long-term investments Book value of long term investments sold +gain (loss) on sale =cash proceeds

  12. Cash from Investing Buildings and Equipment Beginning buildings and equipment balance -original cost of buildings and equipment sold =ending balance

  13. Cash from Financing Dividends paid Beginning balance of retained earnings -dividends declared +net income =ending balance of retained earnings

  14. Cash from Financing Dividends paid Dividends declared -increase in dividends payable =cash paid for dividends

  15. Cash from Financing Issued common stock +borrowed short term debt +borrowed long term debt -dividends paid -treasury stock purchases =cash from financing activities

  16. Analysis of Cash flows • Cash flow patterns • Cash flow ratios

  17. Cash Flow Patterns Start-up, high growth company Large cash inflows from financing pays for • capital expansion • subsidized negative cash flow from operations

  18. Cash flow patterns Steady-state company Cash flow from operation is sufficient to • replenish long term assets • pay dividends

  19. Cash flow pattern Cash cow Large cash inflow from operations • capital expansion • repay loans • pay cash dividends • repurchase of company stock

  20. Cash flow ratios Cash flow–to-net income Cash from operations Net income • Measure of earnings quality • Tends to be greater than 1 • Should remain fairly stable for the years for a specific company

  21. Cash flow ratios Cash flow adequacy Cash from operations Cash required for investing activities • Measures relationship between investment spending and cash generated by operations • Indicate a company’s attitude towards reinvestment in long-lived production assets • When ratio is small it indicates that cash flows from operations fall short of funding growth

  22. Cash flow ratios Cash times interest earned (Cash from operations + Interest paid + Taxes paid) Interest expense • Measures ability to service debt • Generally, a higher ratio indicates more solvency

  23. Free cash flow Profit after tax +depreciation +investment in fixed assets +investment in working capital =free cash flow

  24. Tire City Corporation 1. Given the income statement and balance sheet, determine the operating cash flows, the investment cash flows, and the financing cash flows 2. Determine the value of the firm using the following assumptions: WACC (discount rate)= 15.06% Growth rate= 5.0% 1998 FCF= $759.24

  25. Tire City Corporation

  26. Tire City Corporation

  27. Tire City Corporation

  28. Tire City Corporation

  29. Summary • Operating • Income statement and current assets and liabilities • Investing • Long-term assets • Financing • Long-term liabilities and owner’s equity

  30. Summary • Ratios • Cash flow to net income • Cash flow adequacy • Cash times interest earned

  31. Reading List • Intermediate Accounting by Stice, Stice, Skousen; 15th edition • Principles of Corporate Finance by Brealey, Myers, Allen; 8th edition

More Related