Understanding the Statement of Cash Flows

Understanding the Statement of Cash Flows

Chapter 4

Robinson, Munter, Grant

Grant, Munter & Robinson

Chapter 4 2

Learning Objectives

• Understand the cash flow statement and how it relates to other financial statements

• Direct and indirect methods of presenting operating cash flows

• Investing and financing activities

• Disclosure of noncash transactions

• Free cash flow and analysis


Chapter 4 3

Importance of cash flows

• Accrual-based accounting requires reporting revenues when earned and expenses when incurred – not when cash is exchanged.

• A company cannot pay employees, creditors and others with accrual-based net income.

• Valuation models used in financial analysis are often based on projections of future cash flows.


Chapter 4 4

Statement of Cash Flows

• Summarizes all activity in the cash accounts of the firm via three categories:

• Operating– Indirect– Direct

• Investing

• Financing


Chapter 4 5

Years Ended December 31 (in millions) 2001 2000 1999Net cash provided by (used for) operating activities 1,976 (1,164) 2,140 Net cash provided by (used for) investing activities 2,477 (4,091) (960) Net cash provided by (used for) financing activities (1,820) 5,119 788

Effect of exchange rate change on cash and cash equivalents 148 (100) (33)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,781 (236) 1,935 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,301 3,537 1,602 CASH AND CASH EQUIVALENTS, END OF YEAR 6,082 3,301 3,537

Motorola, Inc. and Subsidiaries


Chapter 4 6

NokiaCash flow summary (EURm)

2001 2000 1999

Operating 6,547 3,509 3,102

Investing (2,679) (2,531) (1,359)

Financing (1,895) (1,034) (574)


Chapter 4 7

Operating activities • Primarily captures

– Income statement items– Short-term/operating assets– Short-term/operating liabilities

• Methods of presentation– Indirect– Direct


Chapter 4 8

Cash Flows from Operating ActivitiesIndirect method

• Reconciles accrual-based net income with cash generated via operations

• Begin with accrual-basis net income– Adjust accrual items to reflect cash basis

• Noncash items (depreciation and amortization)

• Changes in working capital (current assets, current liabilities)

• Reclassify nonoperating items– Appear in other sections of the Statement

• Gains/losses on sales of fixed assets or debt extinguishment


Chapter 4 9

Adjustments to Net Income

• Add back noncash expenses– Depreciation and amortization

• Add working capital decreases– Decreases in current assets– Increases in current liabilities

• Subtract working capital increases– Increases in current assets– Decreases in current liabilities


Chapter 4 10

Years Ended December 31 (in millions) 2001 2000 1999OPERATINGNet earnings (loss) (3,937) 1,318 891 Adjustments to reconcile net earnings (loss) to net cash provided by (used for) operating activities:

Depreciation and amortization 2,552 2,527 2,371 Charges for reorganization of businesses and other charges 5,998 1,483 1,893 Acquired in-process research and development charges 40 332 67 Gains on sales of investments and businesses (1,931) (1,570) (1,180) Deferred income taxes (2,273) 239 (443) Changes in assets and liabilities, net of effects of acquisitions and dispositions:

Accounts receivable 2,445 (1,471) (135) Inventories 1,838 (2,305) (678) Other current assets 249 (532) (16) Accounts payable and accrued liabilities (3,030) (666) 361 Other assets and liabilities 25 (519) (991) Net cash provided by (used for) operating activities 1,976 (1,164) 2,140

Motorola, Inc. and SubsidiariesConsolidated Statements of Cash Flows


Chapter 4 11

Financial year ended December 31, 2001 2000 1999EURm EURm EURm

Cash flow from operating activitiesNet profit 2,200 3,938 2,577

Adjustments, total 4,132 2,805 1,928 Net profit before change in net working capital 6,332 6,743 4,505

Change in net working capital 978 (1,377) (21) Cash generated from operations 7,310 5,366 4,484

Interest received 226 255 189 Interest paid (155) (115) (212) Other financial income and expenses 99 (454) (113) Income taxes paid (933) (1,543) (1,246)

Net cash from operating activities 6,547 3,509 3,102

NokiaConsolidated Cash Flow Statements, IAS


Chapter 4 12

Cash Flows from Operating ActivitiesDirect method

• Recast the income statement to conform to cash-basis listing:

• Cash from customers• Cash to suppliers• Cash for wages• Cash for selling, general and administrative

costs• Cash for interest…


Chapter 4 13

Calculating Cash from customers

+ Beginning balance in Accounts Receivable

+ Revenues

- Ending Accounts Receivable

= Cash received from customers

Beginning A/R + Sales – Payments received = Ending A/R


Chapter 4 14

Calculating Cash paid to suppliers

+ Cost of (sales) revenue

+/- Increase (decrease) in inventory

-/+ Increase (decrease) in accounts payable

= Cash paid to suppliers

The cost of what was sold adjusted for changes in inventory and payments made.


Chapter 4 15

Motorola’s Cash from Operating Activities in Direct Method Format

Cash received from customers 32,449

Cash paid to suppliers (22,637)

Cash paid for S, G & A (1,998)

Cash paid for research and development (4,318)

Cash paid for interest (844)

Cash paid for taxes (676)

Cash from operating activities 1,976


Chapter 4 16

Nokia’s Cash from Operating Activities in Direct Method Format

Cash received from customers 30,905

Cash paid to suppliers (18,156)

Cash paid for S, G & A (2,556)

Cash paid for research and development (2,558)

Cash paid for interest (155)

Cash paid for taxes (933)

Cash from operating activities 6,547


Chapter 4 17

Cash Flows from Investing Activities

• Typically involves noncurrent capital (long-term) assets

• Cash acquisitions of investments, property

• Cash generated upon disposal of assets

• Noncash acquisitions/disposals are reported as Supplemental Information rather than in the body of the Statement of Cash Flows


Chapter 4 18

Years Ended December 31 (in millions) 2001 2000 1999INVESTINGAcquisitions and investments, net (512) (1,912) (632) Proceeds from dispositions of investments and businesses 4,063 1,433 2,556 Capital expenditures (1,321) (4,131) (2,856) Proceeds from dispositions of property, plant and equipment 14 174 468 Sales (purchases) of short-term investments 233 345 (496) Net cash provided by (used for) investing activities 2,477 (4,091) (960)



Chapter 4 19


Cash flow from investing activitiesAcquisition of Group companies, net of acquired cash (131) (400) (178) Purchase of non-current available-for-sale investments (323) (111) (37) Additions in capitalized development costs (431) (393) (271) Long-term loans made to customers (1,129) (776) - Proceeds from (payment of) other long-term receivables 84 - (171) Proceeds from (payment of) short-term receivables (114) 378 128 Capital expenditures (1,041) (1,580) (1,302) Proceeds from disposal of share in Group companies, net of disposed cash - 4 27 Proceeds from sale of non-current available-for-sale investments 204 75 121 Proceeds from sale of fixed assets 175 221 318 Dividends received 27 51 6 Net cash used in investing activities (2,679) (2,531) (1,359)



Chapter 4 20

Cash Flows from Financing Activities

• Long-term liabilities– Cash from borrowing– Cash used for repayment of principle– Under IAS cash interest payments may be here

• Equity– Cash from stock issuance– Cash used to purchase treasury shares– Cash used for dividend payments


Chapter 4 21

Years Ended December 31 (in millions) 2001 2000 1999FINANCINGNet proceeds from (repayment of) commercial paper and short-term borrowings (5,688) 3,884 (403) Net proceeds from issuance of debt 4,167 1,190 501 Repayment of debt (305) (5) (47) Issuance of preferred securities of subsidiary trust - - 484 Issuance of common stock 362 383 544 Payment of dividends (356) (333) (291) Net cash provided by (used for) financing activities (1,820) 5,119 788



Chapter 4 22


Cash flow from financing activitiesProceeds from share issue 77 72 152 Purchase of treasury shares (21) (160) (25) Capital investment by minority shareholders 4 7 28 Proceeds from long-term borrowings 102 - - Repayment of long-term borrowings (59) (82) (6) Proceeds from (repayment of) short-term borrowings (602) 133 (126) Dividends paid (1,396) (1,004) (597) Net cash used in financing activities (1,895) (1,034) (574)



Chapter 4 23

Statement of Cash FlowsAdditional Disclosures

1. Cash paid for interest

2. Cash paid for taxes

• Presented at end of statement (GAAP) or in body of statement (IAS)

• May also highlight significant noncash transactions


Chapter 4 24

Years Ended December 31 (in millions) 2001 2000 1999Effect of exchange rate change on cash and cash equivalents 148 (100) (33)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,781 (236) 1,935 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,301 3,537 1,602 CASH AND CASH EQUIVALENTS, END OF YEAR 6,082 3,301 3,537

Supplemental Cash Flow InformationCASH PAID DURING THE YEAR FOR:Interest 844 529 323 Income taxes 676 130 301



Chapter 4 25

Financial year ended December 31, 2001 2000 1999Foreign exchange adjustment (43) 80 99

Net increase in cash and cash equivalents 1,930 24 1,268 Cash and cash equivalents at beginning of period 4,183 4,159 2,891 Cash and cash equivalents at end of period 6,113 4,183 4,159

Change in net fair value of current Available-for-sale investments 12 - - As reported on balance sheet 6,125 4,183 4,159



Chapter 4 26

Cash analysis

• Determine and examine all sources and uses of cash

• Determine free cash flow– Important for valuation (present value of expected

future free cash flow)

– To the Firm, available to both debt and equity holders

– To Equity, available to equity holders only

• Estimate cash flow with EBITDA


Chapter 4 27

Free Cash Flow to the Firm

Operating cash flow

Plus: Interest Paid Times (1-tax rate)

Less: Investments in Fixed Capital

Free Cash Flow to the Firm


Chapter 4 28

Free Cash Flow to Equity

Operating cash flow

Less: Investments in Fixed Capital

Plus: New Debt Borrowing

Less: Debt Repayment

Free Cash Flow to Equity


Chapter 4 29

Earnings before Interest, Taxes, Depreciation and AmortizationEBITDA

Net income (loss)

Plus: Interest expense

Plus: Tax expense

Plus: Depreciation & Amortization expense

Free Cash Flow Estimate


Chapter 4 30

Summary

• Statement of cash flows– Operating (Indirect, Direct)– Investing – Financing

• Interaction with other statements

• Free cash flow

Documents

Understanding the Statement of Cash Flows