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Statement of Cash Flows

MIM 517 Fall 2010 Class 5

Statement of Cash Flows (SCF)


What financial statements do we have to evaluate a firm?

Income Statement
Balance Sheet

Statement of Cash Flows

Why do we care about cash flow?


1) Somewhat less subject to management
2) Ability to generate future cash flows 3) Ability to pay dividends and meet obligations 4) Differences between N/I and cash flows 5) Decide if the company is using cash wisely?

How were proceeds of debt or stock used? How were expansions financed? How was the retirement of debt accomplished? How much money was borrowed?

What does the SCF do?

Cash by functional category


Why NI cash flows from ops Tells us about the quality of earnings Constructed primarily from B/S and I/S

How the SCF Works

Direct vs. Indirect Method


Common activities in each category

Operating Investing Financing

Categories sum to net change in cash for period

Indirect Method:Operating Section

Reconcile N/I to net change in Cash


Add back non-cash expenses Adjust for changes in operating assets and liabilities

Ex: Overall A/P increased for the year. Thus, add back increase in A/P to N/I. Ex: Overall A/R increased for the year. Thus subtract out the increase in A/R from N/I

Indirect Method: Operating Section


Effect of change in crt assets & liabilities on SCF

Current Assets:

Increase -> Use of cash -> subtract Decrease -> Source of cash -> add Increase -> Source of cash -> add Decrease -> Use of cash -> subtract

Current Liabilities:

Caution: Change in B/S may not articulate


Translation Acquisitions

Analyzing the SCF Overall


Consider where company is in its lifecycle Summary analysis by Inflows and Outflows

Overall comparison of inflows and outflows w/in and across years Where is cash coming from and where is it going? Line by line explanation, focus on large items

Section by section:

Analyzing the SCF Overall: Summary of Inflows & Outflows (Fig. 4.6)
2009 % 2008 % 2007 %

Inflows:
Operations Sale of Mkt Sec Sales of LT assets Sales of C/S Adds to Debt Total

Outflows:
Operation Purchase of PPE Purchase of Mkt Sec Repmts of Debt Dividends Pd Total

Analyzing the SCF Overall: Summary of Inflows & Outflows

Do summary analysis of inflows and outflows for Starbucks. (Refer to the work you did on 4.12 as background.)

Analyzing the Operating Section


Goal is to assess quality of earnings

Look at adjustments

Non-cash charges Are increases to cash sustainable? Look at working capital items. Look at changes in context of revenue trends and company lifecycle

Bottom line: The higher the correlation of N/I with cash provided by ops, the higher the quality of earnings tends to be.

Where to look for problems


Operating Section N/I not tracking w/ cash from operations Increases in provision for uncollectibles Inventories growing faster than sales Current liabilities increasing Debt costs (interest expense in this section!)

Note: Cash flow must be looked at in light of the developmental stage of the company

Where to look for problems cont.


Investing Section Cash from investments in the market? Cash from disposal of fixed assets? Adequate capital investments?
Financing Section Level of stock issuance? Level of debt?

Another Analysis Tool


Free Cash Flow

Aims to assess cash needs for current operations AND expansion with new capital investment. Many possible measures

Ex: Cash flows from ops capital expenditure dividends Take great care in using this!

Other companies
Lets look at your companies

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