Mim Lecture 5

7/27/2019 Mim Lecture 5

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Statement of Cash Flows

MIM 517

Fall 2010Class 5


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Statement of Cash Flows (SCF)

What financial statements do we have toevaluate a firm?

Income Statement

Balance Sheet

Statement of Cash Flows


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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?


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What does the SCF do?

Cash by functional category

Why NI cash flows from ops

Tells us about the qualityof earnings

Constructed primarily from B/S and I/S


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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


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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. Thussubtract out the increase in A/R from N/I


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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

Current Liabilities:

Increase -> Source of cash -> add

Decrease -> Use of cash -> subtractCaution: Change in B/S may not articulate

Translation

Acquisitions


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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

Section by section:

Where is cash coming from and where is it

going?

Line by line explanation, focus on large items


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Analyzing the SCF Overall: Summaryof 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:

OperationPurchase of PPE

Purchase of Mkt Sec

Repmts of Debt

Dividends Pd

Total


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Analyzing the SCF Overall:Summary of Inflows & Outflows

Do summary analysis of inflows andoutflows for Starbucks. (Refer to the workyou did on 4.12 as background.)


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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 thequality of earnings tends to be.


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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 ofthe developmental stage of the company


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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?


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Another Analysis Tool

Free Cash FlowAims to assess cash needs for current

operations AND expansion with new capitalinvestment.

Many possible measures

Ex: Cash flows from ops capital expenditure dividends

Take great care in using this!


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Other companies

Lets look at your companies

Documents

Mim Lecture 5