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Title: Cash Flow Analysis
Description: Cash Flow Analysis Reports operating cash flow as well as other cash flow information. z Provides important information to investors and creditors
Description: Cash Flow Analysis Reports operating cash flow as well as other cash flow information. z Provides important information to investors and creditors
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Cash Flow Analysis
15
...
z
Provides important information to investors
and creditors
...
2
Statement of Cash Flows
z
The cash flow statement separates changes in
cash into three categories:
z
z
z
z
operating cash flow
investing cash flow
financing cash flow
...
3
Why focus on a cash flow statement?
z
Net income reported on the income statement provides an
important measure of performance
...
z
Interest and dividend payments, required principal reductions
on debt, and capital expenditures for plant and equipment
and for expansion cannot be made without cash
...
4
Why focus on a cash flow statement?
z
In the absence of operating cash flow, cash from other
sources can be used to cover cash requirements
...
z
These non-operating sources of cash flow can be relied
upon only in the short run
...
5
1
...
The company borrows $3,000 from
the bank
z
Assets
=
Liabilities
+
z
Cash
Loans Payable
z
+$3,000
+$3,000
Owners’ Equity
Journal Entry
Dr
Cash
Cr
Loans payable
3,000
3,000
7
3
...
Company performs service for $12,000
...
z
Assets
z
Cash
z
+$8,000
=
L + Owners’ Equity
Receivables
Retained Earnings
+$4,000
+$12,000
Journal Entry
Dr
Dr
Cash
Accounts receivable
Cr
Retained earnings (Revenue)
8,000
4,000
12,000
9
5
...
Company pays a dividend of $1,000
z
Assets
z
Cash
z
-$1,000
Dr
=
Liabilities
+
Owners’ Equity
Retained Earnings
-$1,000
Journal Entry
Retained Earnings (Dividends)
Cr
Cash
1,000
1,000
11
Transactions and the Accounting Equation
Cash
+ A/R
+ Equip
...
Cap
...
= L/P +
+10,000
+ 3,000
+ 3,000
+ 5,000
- 5,000
+ 8,000
C
...
+ R/E
+ 4,000
+12,000
- 9,000
- 9,000
- 1,000
- 1,000
6,000
4,000
5,000
3,000
10,000
+ 2,000
15
Statement of Cash Flows
For the year ended December 31, 1997
Operating activities:
Sale of a service (4)
Payments for expenses (5)
Net cash from operating activities
Investing activities:
Purchase of equipment (3)
Net cash from investing activities
Financing activities:
Borrowings (2)
Owner contributions (1)
Payment of dividends (6)
Increase in cash balance
Cash balance at the beginning of the year
Cash balance at the end of the year
8,000
(9,000)
(1,000)
(5,000)
(5,000)
3,000
10,000
(1,000)
12,000
6,000
0
16
6,000
Indirect versus Direct Cash Flow Formats
• Affects only the operating section of the cash flow
statement
• Direct Cash Flow Statement
Sale of a service (4)
(-) Payments for expenses (5)
Net cash from operating activities
• Indirect Cash Flow Statement
Net Income
(-) Sales to customer on account
Net cash from operating activities
8,000
(9,000)
(1,000)
3,000
(4,000)
(1,000)
17
Cash flow statement
z
z
z
In general, differences between net income and CFO (cash flow
from operations) are captured in operating current asset and
operating current liability accounts
Think accrued salaries expense: If employees have not been
paid for the last three days of the year, the journal entry made to
recognize salaries expense is:
Dr Wage Expense (-RE)
4,000
Cr Wages Payable (+L)
4,000
Thus, to arrive at CFO, adjustments that need to be made to Net
Income:
z
z
Subtract net increase in operating current assets other than cash itself
Add net increase in operating current liabilities
18
Indirect cash flow statement depreciation
z
z
What about depreciation?
Net Income = Revenues – Depreciation expenses – Other
expenses
z
z
z
z
z
z
z
What is the cash consequence of recording depreciation
expense?
How are depreciation expenses recorded? Quick tutorial!
Say, buy PP&E for $ 10 million at the beginning of Year 1
Estimated life is 10 years
Estimated scrap value after 10 years: 0
Depreciation method: straight line
Depreciation expense every year: $(10 million / 10) = $ 1 million
19
Quick tutorial on depreciation
– contd
...
Depreciation (+XA)
$1 MM
Accumulated depreciation is a contra-asset account
attached to long-term depreciable assets (like PP&E)
At the end of one year, on balance sheet
Gross value of PP&E:
Less: accumulated depreciation:
Net PP&E:
z
10 million
1 million
9 million
Therefore:
1
...
3
...
The cash effect is zero
The difference is in the Accumulated Depreciation account, NOT
an operating current asset or an operating current liability
20
To arrive at CFO from net
income
z
Start with Net Income
z
z
z
z
Add depreciation expense
Subtract increases in operating non-cash current
assets
Add increases in operating current liabilities
Arrive at CFO
21
To arrive at CFO from net
income
z
Start with Net Income
z
z
z
z
z
z
Add depreciation expense
Add any other non-cash (or accrued) expense that does not
affect operating current assets or current liabilities
Subtract increases in operating non-cash current assets
Add increases in operating current liabilities
Arrive at CFO
Some gray areas
z What do you do with interest expense?
z Where are dividends recorded in the cash flow
statement?
z What do you do with marketable securities? (usually
22
recorded as current assets on the balance sheet)
Cash Flow Statement: Indirect-Method
Scientific Technologies, Inc
...
2003 Annual Report
...
23
Cash Flow Statement: Indirect-Method
Cash flows from investing activities
Property and equipment
Sale (purchase) of S-T investments
Cash flows from investing activities
(1,041)
809
(232)
Cash flows from financing activities
Payments on debt
Reissuance of treasury stock
Dividends
Cash flows from financing activities
(50)
4
(957)
(1,003)
Change in cash and cash equivalent
Cash and cash equivalent at beginning of year
Cash and cash equivalent at end of year
2,144
103
2,247
Data source: Scientific Technologies Inc
...
2004
...
Year Ending December 31, 2003
Cash flows from operating activities
Cash received from customers
Interest received and other cash income
Cash paid to suppliers and employees
Income taxes paid
Interest paid
Cash flows from operating activities
$24,274
685
(19,107)
(2,446)
(7)
$3,379
Data source: Scientific Technologies Inc
...
2004
...
Years Ending December 31, 1990-1994
Revenue
Net income from continuing operations
Cash provided in operating activities
1990
1991
1992
1993
1994
$92,911
1,240
2,646
$95,361
517
2,293
$99,189 $102,734 $106,748
1,217
317
421
2,659
2,108
4,053
Note : thousands of dollars
Data sources: American Consumer Products, Inc
...
1995
...
1992 Annual Report
...
26
A
...
Cross Co
...
T
...
Years Ending December 31, 1990-1994
1990
Revenue
Net income from continuing operations
Cash provided in operating activities
1991
1992
1993
1994
$209,633 $205,248 $187,130 $164,606 $177,136
27,223
21,187
12,773
519
10,534
32,767
26,304
26,396
24,940
26,851
Note : thousands of dollars
Data sources: A
...
Cross, Inc
...
1995
...
T
...
1992 Annual Report
...
27
Summary
z
A CF statement summarizes
z
z
z
z
z
the sources and uses of cash
Operating cash flows are needed for the long-term
survival of a corporation
z Future investments are paid for through operating cash
flows in the long run
In the initial stages of a firm’s life
z Financing cash flows are positive
z Investing cash flows are negative
One can infer a firm’s prospects from a firm’s investing
activity
z High investments (meaning negative investing cash
flows) suggest management anticipates growth
Preparation of a cash flow statement can be difficult!
28
z Details below for your reference
Preparing a cash flow statement
z
CF from Operating activities
z
Net Income
z
Adjust for Non-Cash Changes in Current Accounts
Subtract increase in net accounts receivable
Subtract increase in inventory
Subtract increase in prepaid expenses
Add increase in accounts payable
Add increase in miscellaneous expenses payable
Add increase in taxes payable
29
Preparing a cash flow statement
z
CF from Operating activities
z
Net Income
z
z
Adjust for Non-Cash Changes in Current Accounts
Adjust for Non-Cash Changes in Non-Current
Accounts
Add Depreciation & Amortization
Add Loss on Sale of Assets
Subtract Gain on Sales of Assets
30
Preparing a cash flow statement
z
z
CF from Operating activities
CF from Investing activities
z Add cash received from
z
z
z
Less cash paid for
z
z
z
Sale of Investments
Sales of PP&E
Acquisition of Investments
Acquisition of PP&E
CF from Financing activities
z Add cash from
z
Add cash from
z
Debt issues
Capital stock issues
Less cash paid for
Debt repayment
Dividends
Repurchase of stock
31
Title: Cash Flow Analysis
Description: Cash Flow Analysis Reports operating cash flow as well as other cash flow information. z Provides important information to investors and creditors
Description: Cash Flow Analysis Reports operating cash flow as well as other cash flow information. z Provides important information to investors and creditors