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Mastering Cash Flow Analysis for Financial Success

Learn how to derive cash flow from balance sheet and income statement to understand a firm's financial health. Explore cash flow sources and uses, operating cash flow, and key financial identities. Discover how to interpret cash flow figures and make informed financial decisions.

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Mastering Cash Flow Analysis for Financial Success

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  1. Chapter 2 Cash Flow Identities

  2. What Is The Essence Of Each Side? Asset = Debt + Equity Use of Cash Source of Cash

  3. Cash Flow • Cash in • Cash out • Cash flow ≠ Net Income (Profit or Earnings) • Throughout this textbook and the study of financial management, cash flow will be fundamental • Therefore, we will have to be able to derive cash flow from the information on the balance sheet and the income statement • We will look at how cash is generated from utilizing assets and how it is paid to those that finance the purchase of the assets

  4. How To Determine A Firm’s Cash Flow From Its Financial Statements • Cash flow identity: More 

  5. Notes On Identities: • Operating cash flow = Cash flow from day to day activities • Don’t include interest payments because that goes to bondholders (it properly is a financing expense – different than accountant CFO) • Add back the noncash expense, depreciation • Taxes are paid in cash • Capital spending = net spending on fixed assets (purchases - sales) • Add depreciation back because the net amount has it subtracted out • Change in NWC • CA – CL in beginning and ending period, then take the difference

  6. Notes On Identities: • Net new borrowing = (End long-term debt) – (beg LTD) • Net new equity raised = (End common stock & Paid-in surplus) – (end CS & PIS) • Amounts in calculations can be positive or negative • A negative cash flow from assets may indicate that a firm is buying profitable assets! • A negative amount from change in NWC, could mean that firm is managing inventory or receivables or payables more efficiently! • A negative amount to stockholders could mean that the firm issued an amount of new stock that is more than dividends paid! • Handout #3 

  7. Handout #3

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