Understanding the Statement of Cash Flows - PowerPoint PPT Presentation

understanding the statement of cash flows n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Understanding the Statement of Cash Flows PowerPoint Presentation
Download Presentation
Understanding the Statement of Cash Flows

play fullscreen
1 / 34
Understanding the Statement of Cash Flows
141 Views
Download Presentation
lainey
Download Presentation

Understanding the Statement of Cash Flows

- - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

  1. Understanding the Statement of Cash Flows Chapter 4

  2. Contents • Understand the cash flow statement and how it relates to other financial statements • Direct and indirect methods of presenting operating cash flows • Investing and financing activities • Disclosure of noncash transactions • Free cash flow and analysis Ch 4

  3. Importance of cash flows • Accrual-based accounting requires reporting revenues when earned and expenses when incurred – not when cash is exchanged. • A company cannot pay employees, creditors and others with accrual-based net income. • Valuation models used in financial analysis are often based on projections of future cash flows. Ch 4

  4. Statement of Cash Flows • Summarizes all activity in the cash accounts of the firm via three categories: • Operating • Indirect format • Direct format • Investing • Financing Ch 4

  5. Ch 4

  6. NokiaCash flow summary (EURm) Ch 4

  7. Operating activities • Primarily captures • Income statement items • Short-term/operating assets • Short-term/operating liabilities • Methods of presentation • Indirect • Direct Ch 4

  8. Cash Flows from Operating ActivitiesIndirect method • Reconciles accrual-based net income with cash generated via operations • Begin with accrual-basis net income • Adjust accrual items to reflect cash basis • Noncash items (depreciation and amortization) • Changes in working capital (current assets, current liabilities) • Reclassify nonoperating items • Appear in other sections of the Statement • Gains/losses on sales of fixed assets or debt extinguishment Ch 4

  9. Adjustments on Net Income to Derive Operating Cash Flows Add back noncash expenses • Depreciation and amortization Add working capital decreases • Decreases in current assets • Increases in current liabilities Subtract working capital increases • Increases in current assets • Decreases in current liabilitie Adjust nonoperating items (e.g., gain from sale of fixed assets) • Accruals = Operating Income – Operating cash Flows Ch 4

  10. Ch 4

  11. Ch 4

  12. Cash Flows from Operating ActivitiesDirect method • Cash from customers • Cash to suppliers • Cash for wages • Cash for SGA • Cash for interest… Ch 4

  13. Calculating Cash from customers + Beginning balance in Accounts Receivable + Revenues • Ending Accounts Receivable = Cash received from customers Beginning A/R + Sales – Payments received = Ending A/R Ch 4

  14. Calculating Cash paid to suppliers + Cost of (sales) revenue +/- Increase (decrease) in inventory -/+ Increase (decrease) in accounts payable = Cash paid to suppliers The cost of what was sold adjusted for changes in inventory and payments made. Ch 4

  15. Motorola’s Cash from Operating Activities in Direct Method Format Ch 4

  16. Nokia’s Cash from Operating Activities in Direct Method Format Ch 4

  17. Cash Flows from Investing Activities • Typically involves noncurrent capital (long-term) assets • Cash acquisitions of investments, property • Cash generated upon disposal of assets • Noncash acquisitions/disposals are reported as Supplemental Information rather than in the body of the Statement of Cash Flows Ch 4

  18. Ch 4

  19. Ch 4

  20. Cash Flows from Financing Activities • Long-term liabilities • Cash from borrowing • Cash used for repayment of principle • Under IAS cash interest payments may be here • Equity • Cash from stock issuance • Cash used to purchase treasury shares • Cash used for dividend payments Ch 4

  21. Ch 4

  22. Ch 4

  23. Statement of Cash FlowsAdditional Disclosures • Cash paid for interest • Cash paid for taxes • Presented at end of statement (GAAP) or in body of statement (IAS) • May also highlight significant noncash transactions Ch 4

  24. Ch 4

  25. Ch 4

  26. Cash analysis • Determine and examine all sources and uses of cash • Determine 2 definitions of free cash flows • To the Firm, available to both debt and equity holders • To Equity, available to equity holders only • Important for valuation (present value of expected future free cash flow) Ch 4

  27. Free Cash Flow to the Firm Operating cash flow Plus: Interest Paid Times (1-tax rate) Less: Investments in Fixed Capital Free Cash Flow to the Firm (to both debt holders and stock holders) Ch 4

  28. Free Cash Flow to Equity Operating cash flow Less: Investments in Fixed Capital Plus: New Debt Borrowing Less: Debt Repayment Free Cash Flow to Equity Ch 4

  29. Earnings before Interest, Taxes, Depreciation and Amortization EBITDA Net income (loss) Plus: Interest expense Plus: Tax expense Plus: Depreciation & Amortization expense Free Cash Flow Estimate (to firm) Ch 4

  30. Relevance of Cash Flows and Income over a Company’s Life Cycle Free cash flow + Operating cash flow Financing cash flow Income Inception Growth Maturity Decline Investing cash flow Ch 4

  31. Earnings and Cash Flow, which is more value relevant? • If you could trade stocks based on perfect foresight of next year’s --earnings --cash flow which will help you earn higher returns? • The power to predict future cash flows Ch 4

  32. Financial Accounting Relevance of Accounting Numbers Relation between Accounting Numbers and Stock Prices Ch 4

  33. Accruals--The Cornerstone Relation between Stock Prices and Various Income and Cash Flow Measures for a Large Sample of Companies NIBX = Net Income before Extraordinary Items and Discontinued Operations; NI = Net Income; OCF = Operating Cash Flow; FCF = Free Cash Flows; NCF = Net Cash Flow (Change in Cash). Ch 4

  34. Accruals--The Cornerstone Relation between Stock Returns and both Income and Operating Cash Flows for Different Horizons of a Large Sample of Companies . Ch 4 Source: Dechow, P