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Understanding the Statement of Cash Flows

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Earnings before Interest, Taxes, Depreciation and Amortization. An estimate of Cash Flow ... Plus: Depreciation & Amortization expense. EBITDA. Caution. P14 ... – PowerPoint PPT presentation

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Title: Understanding the Statement of Cash Flows


1
Understanding the Statement of Cash Flows
  • Chapter 4
  • UWYO COB ACCT 2000

2
Learning Objectives
  • The uses of cash flow information
  • Understand cash flow statement
  • Cash flows from operating activities
  • Cash flows from investing activities
  • Cash flows from financing activities
  • Estimate free cash flow and EBITDA

3
The uses of cash flows
  • Evaluate liquidity
  • A company cannot pay employees, creditors and
    others with accrual-based net income.
  • Evaluate the ability to generate cash flow from
    operation
  • A cash-based measure of profitability
  • Assess the quality of earnings
  • Persistent and large difference between earnings
    and cash flows is an indication of poor quality
    of earnings
  • Predict future cash flows

4
Statement of Cash Flows
  • Explain the change of the cash accounts via three
    categories
  • Net cash flows from operating activities
  • Net cash flows from investing activities
  • Net cash flows from financing activities
  • Cash paid for interest and dividend operating or
    financing?

5
An example of Statement of Cash Flows
P5, P2, P16
6
Cash Flows from Operating Activities
  • Provide information about the ability to generate
    cash flow from operation
  • A cash-based measure of profitability
  • Methods of presentation
  • Direct the cash version of income statement
  • Indirect Net income adjusted for certain items

7
Cash Flows from Operating Activities Direct
method
  • Cash collected from customers
  • Cash paid to suppliers
  • Cash paid for wages
  • Cash paid for SGA costs
  • Cash paid for interest

8
An example of Cash Flows from Operating
Activities - Direct Method
9
Cash Flows from Operating Activities Indirect
method
  • Begin with net income
  • Make adjustments
  • Non-cash items
  • Changes in working capital
  • Remove non-operating items

10
An example of Cash Flows from Operating
Activities - Indirect Method
  • P4, P8, P12

11
Cash Flows from Investing Activities
  • Typically involves non-current assets
  • Cash acquisitions of investments and property
  • Cash generated upon disposal of investments and
    property

12
An example of Cash Flows from Investing Activities
P10
13
Cash Flows from Financing Activities
  • Long-term liabilities
  • Cash obtained from borrowing
  • Cash used for the repayment of principal
  • Equity
  • Cash obtained from stock issuance
  • Cash used to repurchase treasury shares
  • Cash used for dividend payments

14
An example of Cash Flows from Financing Activities
P3, P5, P17
15
Statement of Cash FlowsAdditional Disclosures
  • Cash paid for interest
  • Cash paid for taxes
  • Significant non-cash transactions

16
An example of Additional Disclosures
17
Cash analysis
  • Determine free cash flow
  • Free cash flow to the firm
  • available to both debt and equity holders
  • Free cash flow to equity
  • available to equity holders only
  • Estimate cash flow with EBITDA

18
Free Cash Flow (FCF)
  • FCF to the firm
  • Operating cash flow
  • Plus Interest paid (1-tax rate)
  • Plus Disposition of fixed capital
  • Less Investments in fixed capital
  • Free cash flow to the firm
  • FCF to equity
  • Operating cash flow
  • Plus Disposition of fixed capital
  • Less Investments in fixed capital
  • Plus New Debt Borrowing
  • Less Debt Repayment
  • Free cash flow to equity
  • P13

19
Earnings before Interest, Taxes, Depreciation and
Amortization
  • An estimate of Cash Flow
  • Net income (loss)
  • Plus Interest expense
  • Plus Tax expense
  • Plus Depreciation Amortization expense
  • EBITDA
  • Caution
  • P14 P9

20
Summary
  • The uses of cash flow information
  • Statement of cash flows
  • Operating
  • Investing
  • Financing
  • Cash analysis
  • Free cash flow
  • EBITDA

21
Problems and Cases
  • Statement of cash flows
  • Operating
  • General P15 (B), P2 (D), P16 (A)
  • Indirect method P4 (B), P8 (OCF140), P12
    (OCF13,050,000)
  • Investing
  • P10 (-50 million cash from investing activities)
  • Financing
  • P3 (B), P5 (C), P17 (B)
  • Cash analysis
  • Free cash flow
  • P13 (FCF includes primarily operating and
    investing cash flows),
  • EBITDA
  • P14 (? Working Capital) P9 (a. not sufficient
    b. ? Working Capital)

22
Problems and Cases
  • Case 4-1
  • Cash flows and earnings can be very different.
  • Change of working capital may be attributable to
    the difference (e.g. large increase of account
    receivable)
  • Again, pay attention to one-time charges
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