INFO. FOR BUSINESS DECISIONS - ACTG. 011 - SPRING 2006Slide19-1

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Session 19SCF and FSA
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Businesses are like Fruit Trees
Fruit Operating Activities
Trunk Branches Investing Activities
Roots Financing Activities
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Statement of Cash Flows

• Operating Cash
• Day-to-day activities
• Usually impacts C/A or C/L
• Excludes marketable sec. bank debt
• Investing
• Marketable sec. capital assets
• Financing
• Debt
• Equity
• Dividends

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SCF-Operating Cash

• Indirect method
• Begin with net income
• Adjust for non-cash items
• Summarize working capital changes
• Direct method
• Specific cash receipts
• Specific cash disbursements
• FASB preferred method

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SCF-Analysis

• O-I-F Footprint
• Existence of cash

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Can You Explain the SCF?

• Use non-accounting terms
• Think of the fruit tree analogy
• Remember the ease of using the direct method for
  the operating cash flow section

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Financial Statement Analysis

• Background
• Financial assessment
• Other information
• Conclusions

TELL A STORY

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Background

• Industry overview
• Company overview
• Use footnote information if available

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Financial Assessment

• Comments on the auditors report
• Name of auditor
• Type of opinion
• GAAP and GAAS used
• Percentage analysishorizontal and vertical
• Key ratios
• Comparisons
• Trends

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Key Ratios

• Refer to Exhibit 14-3
• Add the operating ratios we discussed in class

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Other Factors

• Key events as discussed in the footnotes
• Use the MDA, if available

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Conclusions

• Base on the intent of your analysis
• Consider any specific instructions

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Balance Sheet Considerations

• Consider the basic accounting equation
• Disaggregate ROA
• ROA return on assets NI/Avg. assets
• ROA Profit margin X asset turnover
• ROA NI/Sales X sales/avg. assets
• Further analyze the PL s and the operating
  ratios

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Income Statement Considerations

• Major changes in key accounts
• Use trends and vertical analysis

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SCF Considerations

• The cash footprint
• Cash conversion cycle
• CCC DSO DII DIP 0
• Major changes in key components

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Operating Ratios

• Days sales outstanding ending A/R / average
  daily sales
• Days in inventory ending Inv. / average daily
  COGS
• Days in payables ending A/P / average daily
  COGS
• Cash Conversion Cycle DSO DII - DIP

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Operating Ratios, cont.

• A/R turns sales / avg. A/R
• Inventory turns COGS / avg. inventory
• A/P turns COGS / avg. A/P