lecture16

Vista previa del material en texto

Financial Analysis
Class #16: Cash flow analysis
Ana Elisa Pereira
October, 2018
Class #16: Cash flow analysis Financial Analysis
Accounting Statement of Cash Flows
• Statement of cash flows:
I reports a firm’s cash inflows and outflows during a period of time...
I segregated into three categories:
1. operating activities
2. investing activities
3. financing activities
• Firms in the US are required to report it
• Together with the other statements, it helps to assess and identify:
I a company’s ability to generate future net cash inflows
∗ to pay debts, interest, and dividends
I a company’s need for external financing
I the reasons for differences between net income and net cash flow
from operating activities
I the effects of cash and noncash investing and financing transactions
∗ important to also construct funds statement to fully understant
noncash transactions
Class #16: Cash flow analysis Financial Analysis
Accounting Statement of Cash Flows
• Statement of cash flows:
I reports a firm’s cash inflows and outflows during a period of time...
I segregated into three categories:
1. operating activities
2. investing activities
3. financing activities
• Firms in the US are required to report it
• Together with the other statements, it helps to assess and identify:
I a company’s ability to generate future net cash inflows
∗ to pay debts, interest, and dividends
I a company’s need for external financing
I the reasons for differences between net income and net cash flow
from operating activities
I the effects of cash and noncash investing and financing transactions
∗ important to also construct funds statement to fully understant
noncash transactions
Class #16: Cash flow analysis Financial Analysis
Accounting Statement of Cash Flows
• Statement of cash flows:
I reports a firm’s cash inflows and outflows during a period of time...
I segregated into three categories:
1. operating activities
2. investing activities
3. financing activities
• Firms in the US are required to report it
• Together with the other statements, it helps to assess and identify:
I a company’s ability to generate future net cash inflows
∗ to pay debts, interest, and dividends
I a company’s need for external financing
I the reasons for differences between net income and net cash flow
from operating activities
I the effects of cash and noncash investing and financing transactions
∗ important to also construct funds statement to fully understant
noncash transactions
Class #16: Cash flow analysis Financial Analysis
Accounting Statement of Cash Flows
• Statement of cash flows:
I reports a firm’s cash inflows and outflows during a period of time...
I segregated into three categories:
1. operating activities
2. investing activities
3. financing activities
• Firms in the US are required to report it
• Together with the other statements, it helps to assess and identify:
I a company’s ability to generate future net cash inflows
∗ to pay debts, interest, and dividends
I a company’s need for external financing
I the reasons for differences between net income and net cash flow
from operating activities
I the effects of cash and noncash investing and financing transactions
∗ important to also construct funds statement to fully understant
noncash transactions
Class #16: Cash flow analysis Financial Analysis
Accounting Statement of Cash Flows
• Statement of cash flows:
I reports a firm’s cash inflows and outflows during a period of time...
I segregated into three categories:
1. operating activities
2. investing activities
3. financing activities
• Firms in the US are required to report it
• Together with the other statements, it helps to assess and identify:
I a company’s ability to generate future net cash inflows
∗ to pay debts, interest, and dividends
I a company’s need for external financing
I the reasons for differences between net income and net cash flow
from operating activities
I the effects of cash and noncash investing and financing transactions
∗ important to also construct funds statement to fully understant
noncash transactions
Class #16: Cash flow analysis Financial Analysis
Accounting Statement of Cash Flows
• Statement of cash flows:
I reports a firm’s cash inflows and outflows during a period of time...
I segregated into three categories:
1. operating activities
2. investing activities
3. financing activities
• Firms in the US are required to report it
• Together with the other statements, it helps to assess and identify:
I a company’s ability to generate future net cash inflows
∗ to pay debts, interest, and dividends
I a company’s need for external financing
I the reasons for differences between net income and net cash flow
from operating activities
I the effects of cash and noncash investing and financing transactions
∗ important to also construct funds statement to fully understant
noncash transactions
Class #16: Cash flow analysis Financial Analysis
Accounting Statement of Cash Flows
• Statement of cash flows:
I reports a firm’s cash inflows and outflows during a period of time...
I segregated into three categories:
1. operating activities
2. investing activities
3. financing activities
• Firms in the US are required to report it
• Together with the other statements, it helps to assess and identify:
I a company’s ability to generate future net cash inflows
∗ to pay debts, interest, and dividends
I a company’s need for external financing
I the reasons for differences between net income and net cash flow
from operating activities
I the effects of cash and noncash investing and financing transactions
∗ important to also construct funds statement to fully understant
noncash transactions
Class #16: Cash flow analysis Financial Analysis
Statement of Cash Flows
The statement of cash flows explains changes in cash (and cash equiva-
lents, such as Treasury bills) by listing the activities that increased cash
and those that decreased cash. Each activity’s cash inflow or outflow is
segregated according to one of three broad category types: operating,
investing, or financing activity.
Class #16: Cash flow analysis Financial Analysis
Operating activities
• Transactions not defined as investing or financing activities.
• Cash flows from transactions affecting determination of net income.
• We see items that not everyone might think of as “operating” flows
I such as dividends and interest received, as well as interest paid.
Cash inflows:
• From sales of goods or services
• From returns on loans (interest income) and equity securities
(dividend income)
Cash outflows:
• To pay suppliers for inventory
• To pay employees for services
• To pay lenders (interest)
• To pay government for taxes
• To pay other suppliers for other operating expenses
Class #16: Cash flow analysis Financial Analysis
Operating activities
• Transactions not defined as investing or financing activities.
• Cash flows from transactions affecting determination of net income.
• We see items that not everyone might think of as “operating” flows
I such as dividends and interest received, as well as interest paid.
Cash inflows:
• From sales of goods or services
• From returns on loans (interest income) and equity securities
(dividend income)
Cash outflows:
• To pay suppliers for inventory
• To pay employees for services
• To pay lenders (interest)
• To pay government for taxes
• To pay other suppliers for other operating expenses
Class #16: Cash flow analysis Financial Analysis
Operating activities
• Transactions not defined as investing or financing activities.
• Cash flows from transactions affecting determination of net income.
• We see items that not everyone might think of as “operating” flows
I such as dividends and interest received, as well as interest paid.
Cash inflows:
• From sales of goods or services
• From returns on loans (interest income) and equity securities
(dividend income)
Cash outflows:
• To pay suppliers for inventory
• To pay employees for services• To pay lenders (interest)
• To pay government for taxes
• To pay other suppliers for other operating expenses
Class #16: Cash flow analysis Financial Analysis
Comments
• It would seem logical to classify interest and dividends “received” as
investing inflows...
• whereas interest “paid” certainly looks like a financing outflow.
I (In fact, three out of seven Financial Accounting Standards Board
members disagreed with classifying interest and dividends received
and interest paid as cash flows from operating activities)
Class #16: Cash flow analysis Financial Analysis
Investing activities
• Shows impact of buying and selling fixed assets and debt or equity
securities of other entities.
Cash inflows:
• From sale of fixed assets (property, plant, equipment)
• From sale of debt or equity securities (other than cash equivalents)
of other entities
Cash outflows:
• To acquire fixed assets (property, plant, equipment)
• To purchase debt or equity securities of other entities
Class #16: Cash flow analysis Financial Analysis
Investing activities
• Shows impact of buying and selling fixed assets and debt or equity
securities of other entities.
Cash inflows:
• From sale of fixed assets (property, plant, equipment)
• From sale of debt or equity securities (other than cash equivalents)
of other entities
Cash outflows:
• To acquire fixed assets (property, plant, equipment)
• To purchase debt or equity securities of other entities
Class #16: Cash flow analysis Financial Analysis
Investing activities
• Shows impact of buying and selling fixed assets and debt or equity
securities of other entities.
Cash inflows:
• From sale of fixed assets (property, plant, equipment)
• From sale of debt or equity securities (other than cash equivalents)
of other entities
Cash outflows:
• To acquire fixed assets (property, plant, equipment)
• To purchase debt or equity securities of other entities
Class #16: Cash flow analysis Financial Analysis
Financing activities
• Shows impact of all cash transactions with shareholders and the
borrowing and repaying transactions with lenders.
Cash inflows:
• From borrowing
• From the sale of the firm’s own equity securities
Cash outflows:
• To repay amounts borrowed (principal)
• To repurchase the firm’s own equity securities
• To pay shareholders dividends
Class #16: Cash flow analysis Financial Analysis
Financing activities
• Shows impact of all cash transactions with shareholders and the
borrowing and repaying transactions with lenders.
Cash inflows:
• From borrowing
• From the sale of the firm’s own equity securities
Cash outflows:
• To repay amounts borrowed (principal)
• To repurchase the firm’s own equity securities
• To pay shareholders dividends
Class #16: Cash flow analysis Financial Analysis
Financing activities
• Shows impact of all cash transactions with shareholders and the
borrowing and repaying transactions with lenders.
Cash inflows:
• From borrowing
• From the sale of the firm’s own equity securities
Cash outflows:
• To repay amounts borrowed (principal)
• To repurchase the firm’s own equity securities
• To pay shareholders dividends
Class #16: Cash flow analysis Financial Analysis
Alternative Forms of the Statement
• The cash flow statement may be presented using:
I a “direct method”, or
I an “indirect method”
• Direct method is encouraged by the FASB because it is easier to
understand
• Indirect method is probably followed by the majority of firms
because it is easier to prepare
• Difference between the two concerns operating activities
I investing and financing activity sections would be identical under
either method
• For practical purposes, the indirect method is just a reduced version
of the direct method of presentation
Class #16: Cash flow analysis Financial Analysis
Alternative Forms of the Statement
• The cash flow statement may be presented using:
I a “direct method”, or
I an “indirect method”
• Direct method is encouraged by the FASB because it is easier to
understand
• Indirect method is probably followed by the majority of firms
because it is easier to prepare
• Difference between the two concerns operating activities
I investing and financing activity sections would be identical under
either method
• For practical purposes, the indirect method is just a reduced version
of the direct method of presentation
Class #16: Cash flow analysis Financial Analysis
Alternative Forms of the Statement
• The cash flow statement may be presented using:
I a “direct method”, or
I an “indirect method”
• Direct method is encouraged by the FASB because it is easier to
understand
• Indirect method is probably followed by the majority of firms
because it is easier to prepare
• Difference between the two concerns operating activities
I investing and financing activity sections would be identical under
either method
• For practical purposes, the indirect method is just a reduced version
of the direct method of presentation
Class #16: Cash flow analysis Financial Analysis
Direct and Indirect methods
Under the direct method:
• operating cash flows are reported (directly) by major classes of
operating cash receipts (from customers) and payments (to suppliers
and employees)
• a separate reconciliation of net income to net cash flow from
operating activities must be provided
Under the indirect method:
• the reconciliation of net income to net cash flow from operating
activities moves up to replace the direct method’s operating activity
cash-flow section.
In short:
Under the direct method, the cash flows from operating activities will
include the amounts for lines such as cash from customers and cash
paid to suppliers. In contrast, the indirect method will show net income
followed by the adjustments needed to convert the total net income to
the cash amount from operating activities.
Class #16: Cash flow analysis Financial Analysis
Direct and Indirect methods
Under the direct method:
• operating cash flows are reported (directly) by major classes of
operating cash receipts (from customers) and payments (to suppliers
and employees)
• a separate reconciliation of net income to net cash flow from
operating activities must be provided
Under the indirect method:
• the reconciliation of net income to net cash flow from operating
activities moves up to replace the direct method’s operating activity
cash-flow section.
In short:
Under the direct method, the cash flows from operating activities will
include the amounts for lines such as cash from customers and cash
paid to suppliers. In contrast, the indirect method will show net income
followed by the adjustments needed to convert the total net income to
the cash amount from operating activities.
Class #16: Cash flow analysis Financial Analysis
Direct and Indirect methods
Under the direct method:
• operating cash flows are reported (directly) by major classes of
operating cash receipts (from customers) and payments (to suppliers
and employees)
• a separate reconciliation of net income to net cash flow from
operating activities must be provided
Under the indirect method:
• the reconciliation of net income to net cash flow from operating
activities moves up to replace the direct method’s operating activity
cash-flow section.
In short:
Under the direct method, the cash flows from operating activities will
include the amounts for lines such as cash from customers and cash
paid to suppliers. In contrast, the indirect method will show net income
followed by the adjustments needed to convert the total net income to
the cash amount from operating activities.
Class #16: Cash flow analysis Financial Analysis
Direct and Indirect methods: example
Class #16: Cash flow analysis Financial Analysis
Worksheet for preparing the statement of cash flow
• We can check how it was constructed using Balance Sheets and
Income Statement info
Class #16: Cash flow analysis Financial Analysis
Direct and Indirect methods
• The reconciliation in the bottom of FrameA:
I starts with reported net income
I adjusts this figure for noncash income statement items (e.g.,
depreciation)
I adjusts for related changes in balance sheet items to determine cash
provided by operating activities
Class #16: Cash flow analysis Financial Analysis
Analyzing the Statement of Cash Flows
• Cash flow from operating activities was $219,000.
• The company spent $169,000 – about 75% of its entire operating
cash flow – on fixed assets and long-term investments.
• This left only $50,000 of operating cash flow to cover dividend
payments of $143,000.
• Increased borrowings (mostly short term) provided the additional
financing to cover dividend payments
I and provide for a small increase in cash and cash equivalents.
• Half of the operating cash flow goes to replace depreciating assets
⇒ The firm’s ability to maintain its current dividend seems to depend on
its ability to continue to borrow funds.
• Signal that the firm will be encountering difficulty in maintaining its
current dividend into the future.
Class #16: Cash flow analysis Financial Analysis
Analyzing the Statement of Cash Flows (cont.)
• From the reconciliation section (net income to net cash provided by
operating activities) in Frame A we see that
I a decrease in receivables helped increase cash provided by operating
activities
I an increase in inventories and a large decrease in accrued taxes helped
use up cash from operations.
For a healthy, growing firm “generally” expect:
• Positive cash flow from operating activities;
• Negative cash flow from investing activities;
• Positive or negative cash flow from financing activities (which
may move back and forth over time).
Class #16: Cash flow analysis Financial Analysis
Analyzing the Statement of Cash Flows (cont.)
• From the reconciliation section (net income to net cash provided by
operating activities) in Frame A we see that
I a decrease in receivables helped increase cash provided by operating
activities
I an increase in inventories and a large decrease in accrued taxes helped
use up cash from operations.
For a healthy, growing firm “generally” expect:
• Positive cash flow from operating activities;
• Negative cash flow from investing activities;
• Positive or negative cash flow from financing activities (which
may move back and forth over time).
Class #16: Cash flow analysis Financial Analysis
Implications of Cash Flow Statement Analysis
As you may have noticed:
• The cash flow statement gives you much of the same information as
the sources and uses of funds statement.
• However, with the direct method of cash-flow presentation, you do
get some additional details
I in comparison to an analysis of balance sheet changes.
• A major benefit of the statement of cash flows (especially under the
direct method):
I The user gets a reasonably detailed picture of a company’s operating,
investing, and financing transactions involving cash.
• The three-part breakdown of cash flow helps assess the company’s
current and potential future strengths and weaknesses.
Class #16: Cash flow analysis Financial Analysis
Implications of Cash Flow Statement Analysis
As you may have noticed:
• The cash flow statement gives you much of the same information as
the sources and uses of funds statement.
• However, with the direct method of cash-flow presentation, you do
get some additional details
I in comparison to an analysis of balance sheet changes.
• A major benefit of the statement of cash flows (especially under the
direct method):
I The user gets a reasonably detailed picture of a company’s operating,
investing, and financing transactions involving cash.
• The three-part breakdown of cash flow helps assess the company’s
current and potential future strengths and weaknesses.
Class #16: Cash flow analysis Financial Analysis
Implications of Cash Flow Statement Analysis
• Strong internal generation of operating cash, over time, would be
considered a positive sign.
• Poor operating cash flow should prompt we to check for unhealthy
growth in receivables and/or inventory.
• However, strong operating cash flow is not enough to ensure success.
• We need to see the extent to which operating cash is funding
needed investments, debt reductions, and dividends.
• Too much reliance on external financing sources to meet recurring
needs may be a danger signal.
Class #16: Cash flow analysis Financial Analysis
Problem in class
• Prepare and analyze the company’s Sources and Uses Statament
and Cash Statement (indirect method).
Class #16: Cash flow analysis Financial Analysis
Sources and Uses statement
Class #16: Cash flow analysis Financial Analysis
Cash flow statement
Class #16: Cash flow analysis Financial Analysis
References
• Van Horne & Wachowicz (2009) - Chapter 7
Class #16: Cash flow analysis Financial Analysis