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1、Discipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 1Financial Valuation and StrategyCash Flow AnalysisLecture 7Discipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 2Topics for Lecture 7Understand how cash flows are relevant to

2、 analysing financial statementsPreparation and analysis of the cash flow statementInterpret cash flows from operationsAnalyse cash flows under different alternative company/business conditionsUnderstand alternative measures of cash flowsDiscipline of Finance SILC Program Financial Valuation and Stra

3、tegy 25050 Lecture 7Slide 3Statement of Cash Flows Relevance of Cash FlowsCash Defined - refers to cash and cash equivalents.Cash equivalents are short-term, highly liquid investments that are (1) readily convertible to known amounts of cash, and (2) near maturity (typically within 3 months) with li

4、mited risk of price changes due to interest rate shifts.Discipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 4Statement of Cash Flows Relevance of Cash FlowsCash is the beginning and the end of a companys operating cycle.Net cash flow is the end measure of profita

5、bility.Cash repays loans, replaces equipment, expands facilities, and pays dividends.Analyzing cash inflows and outflows helps assess liquidity, solvency, and financial flexibility.Liquidity is the nearness to cash of assets and liabilities.Solvency is the ability to pay liabilities when they mature

6、.Financial flexibility is the ability to react to opportunities and adversities.Discipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 5Statement of Cash Flows Relevance of Cash FlowsStatement of cash flows (SCF) helps address questions such as:How much cash is gene

7、rated from or used in operations?What expenditures are made with cash from operations?How are dividends paid when confronting an operating loss?What is the source of cash for debt payments?What is the source of cash for redeeming preferred stock?How is the increase in investments financed?What is th

8、e source of cash for new plant assets?Why is cash lower when e increased?What is the use of cash from new financing?Discipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 6Interrelations between cash and noncash balance sheet accounts can be generalized:Net changes

9、in cash are explained by net changes in noncash balance sheet accounts.Changes within or among noncash balance sheet accounts do not affect cash. Yet, there is disclosure of all significant financing and investing activities in a separate schedule of noncash investing and financing activities.Change

10、s within the components of cash are not reported.Statement of Cash Flows Cash Flow RelationsDiscipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 7Statement of Cash Flows Reporting by ActivitiesStatement of cash flows reports receipts and payments by operating, fin

11、ancing, and investing activitiesOperating activities are the earningrelated activities of a company.Investing activities are means of acquiring and disposing of noncash assets.Financing activities are means of contributing, withdrawing, and servicing funds to support business activities.Discipline o

12、f Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 8Cash AnalysisOperating, Investing and FinancingIs each one positive? Negative? Recently changed?Compare to prior years to get an idea of where in the product life cycle the company is locatedDetermines need for cashVery im

13、portant when managing cash and budgeting for the futureCrucial when credit is tight or expensive such as in 2008Discipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 9Statement of Cash Flows Net Cash Flows from OperationsIndirect Method-Net e is adjusted for non-ca

14、sh e (expense) items and accruals to yield cash flow from operationsDirect Method-Each e item is adjusted for its related accruals*Both methods yield identical results-only the presentation formatdiffers.Discipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 10State

15、ment of Cash FlowsIndirect MethodNet Cash Flows from Operations Net e+ Depreciation+/- Gains (losses) on sales of assets+/- Cash generated (used) by current assets and liabilities Net cash flows from operating activitiesDiscipline of Finance SILC Program Financial Valuation and Strategy 25050 Lectur

16、e 7Slide 11Statement of Cash Flows Depreciation Add-Back Sales- Expenses- Depreciation and amortization expense Net e+ Depreciation expense+/- Gains (losses) on sales of assets+/- Cash generated (used) by current assets and liabilities Net cash flows from operating activitiesAdd BackDiscipline of Fi

17、nance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 12Statement of Cash Flows e vs. Cash Flows ExampleConsider a $100 sale on accountIn period of sale, net e is increased by $100 but no cash has been generated.Net e100Depreciation and amortization expense 0Gains (losses) on sale

18、 of assets 0Change in accounts receivable (100)Net Cash flow from operations 0In period of collection no e is recorded.Net e 0Depreciation and amortization expense 0Gains (losses) on sale of assets 0Change in accounts receivable 100Net Cash flow from operations100Discipline of Finance SILC Program F

19、inancial Valuation and Strategy 25050 Lecture 7Slide 13Statement of Cash FlowsConstructing the Statement Increase DecreaseAssets (Outflow)InflowLiabilitiesInflow (Outflow)Discipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 14Statement of Cash FlowsConstructing th

20、e StatementDiscipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 15NotesThe company purchased a truck during the year at a cost of $30,000 that was financed in full by the manufacturer.A truck with a cost of $10,000 and a net book value of $2,000 was sold during th

21、e year for $7,000. There were no other sales of depreciable assets.3.Dividends paid during Year 2 are $51,000Lets try this with . ACORN!Look at the assets: if they increase in value this represents a USE of cash.Cash has gone down by $4,695,830This is what you have to explainRestricted cash has gone

22、 up by $969,111 this is a use of regular cash! allocate to operationsCan you give an example of restricted cash?Cash that is needed in a bank to maintain a minimum balanceDiscipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 16Need to allocate each item20082009Chan

23、ge in cashOPERATIONSINVESTINGFINANCINGRestricted cash$1,425,102$2,394,213-$969,111-$969,111Discipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 17RESTRICTED CASH HAS GONE UP! This is a USE of cash it TAKES cash away so therefore it is a negative cash flow in opera

24、tions.Are all the accounts easy to allocate?Some items go into the financing or investment columnExample: notes payableSome need to go in two columns!For example:Property plant and equipment went down by $823,030This has to be allocated to operations (depreciation) and to investingDepreciation is HI

25、DDEN in general and admin expenses. From annual report $ 5,561,533Therefore the property plant and equipment increase used $4,738,503 of cash in investing!Discipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 18Need to allocate each item20082009Change in cashOPERAT

26、IONSINVESTINGFINANCINGProperty, Plant and Equipment$15,641,434$14,818,404$823,030$5,561,533-$4,738,503Discipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 19PPE HAS GONE DOWN! This is a SOURCE of cash it PROVIDES cash so therefore it is a positive overall cash flo

27、w.We divide this up between operations (positive due to depreciation being a non-cash expense) and investing.Once you have allocated everythingJust sum the columns!Easy? Try it in the tutorial question with Acorn!On an exam: you may be asked to allocate specific accounts! But you will be given all t

28、he information needed! (and sometimes even more than you need!)Discipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 20Discipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 21Statement of Cash FlowsIndirect method procedureStart w

29、ith Net eAdjust Net e for non-cash expenses and gainsRecognize cash inflows (outflows) from changes in current assets and liabilitiesSum to yield net cash flows from operationsChanges in long-term assets yield net cash flows from investing activitiesChanges in long-term liabilities and equity accoun

30、ts yield net cash flows from financing activitiesSum cash flows from operations, investing, and financing activities to yield net change in cash(8)Add net change in cash to the beginning cash balance to yield ending cashDiscipline of Finance SILC Program Financial Valuation and Strategy 25050 Lectur

31、e 7Slide 22Statement of Cash FlowsSteps in Constructing the StatementDiscipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 23Statement of Cash FlowsSpecial TopicsEquity Method Investments Under equity method accounting, investor records its proportionate share of i

32、nvestee company profits. The position of reported earnings in excess of dividends received should be eliminated as it is non-cash earnings.Acquisitions of Companies with Stock Acquisitions made with stock are non-cash. As a result, changes in balance sheet accounts reflecting the acquired company wi

33、ll not equal cash inflows (outflows) reported in the Statement of Cash Flows.Postretirement Benefit Costs The excess of net postretirement benefit expense over cash benefits paid must be added to net e in computing net cash flows from operationsSecuritization of Accounts Receivable Reductions in rec

34、eivables as a result of securitization increases net cash flows from operations. Securitizations are a financing activity and should be interpreted as such. Discipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 24Deriving Operating Cash Flows from e for Gould.Amoun

35、tItem(in thousands)ExplanationNet e, accrual basis$ 54Starting point of conversionAdd (deduct) adjustment to cash basis:Depreciation35Depreciation has no cash outflow.Gain on sale of assets(5)Remove gain (because it is nonoperating)cash inflow is cash from investing activities.Increase in receivable

36、s(9)Cash flow from sales is less than accrual sales.Decrease in inventories6Cash outflow for inventory exceeds accrual inventory cost included in cost of sales.Decrease in prepaids3Cash outflow occurred when prepaids were purchased-current expense is non-cashDecrease in accounts payable(5)Cash outfl

37、ows for purchases (included in cost of goods sold) is less than accrual purchases cost.Increase in accrued expenses4Expense has been recognized but no cash paid _yet.Cash flows from operations (Exhibit 7.3)$113Cash From Operations Indirect Method for CFODiscipline of Finance SILC Program Financial V

38、aluation and Strategy 25050 Lecture 7Slide 25Cash From Operations CFO and Net e for Selected CompaniesDiscipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 26Cash From Operations Interpreting Accrual e and Operating Cash FlowDiscipline of Finance SILC Program Finan

39、cial Valuation and Strategy 25050 Lecture 7Slide 27Net e plus major noncash expenses (typically depreciation and amortization)Cash From Operations Alternative Cash Flow MeasureDiscipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 28While both successful and unsucce

40、ssful companies can experience problems with cash flows from operations, the reasons are markedly different.We must interpret changes in operating working capital items in light of economic circumstances.Inflationary conditions add to the financial burdens of companies and challenges for analysis.Ca

41、sh From Operations Business Conditions and Cash FlowsDiscipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 29Cash flows from operationsDeduct:Net capital expenditures required to maintain productive capacityDividends on preferred stock and common stock (assuming a

42、payout policy)EqualsFree cash flow (FCF)Cash From Operations Free Cash FlowDiscipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 30Positive free cash flow reflects the amount available for business activities after allowances for financing and investing requirement

43、s to maintain productive capacity at current levels.Growth and financial flexibility depend on adequate free cash flow.Recognize that the amount of capital expenditures needed to maintain productive capacity is generally not disclosedinstead, most use total capital expenditures, which is disclosed,

44、but can include outlays for expansion of productive capacity.Cash From Operations Free Cash FlowDiscipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 31The statement of cash flows is useful in identifying misleading or erroneous operating results or expectations.Ca

45、sh From Operations Cash Flow as ValidatorsDiscipline of Finance SILC Program Financial Valuation and Strategy 25050 Lecture 7Slide 32Cash Flow Adequacy Ratio Measure of a companys ability to generate sufficient cash from operations to cover capital expenditures, investments in inventories, and cash

46、dividends:Three-year sum of cash from operationsThree-year sum of expenditures, inventory additions, and cash dividendsCash Reinvestment Ratio Measure of the percentage of investment in assets representing operating cash retained and reinvested in the company for both replacing assets and growth in operations:Operating cash flow DividendsGross plant + Investment + Other assets + W