Anda di halaman 1dari 25

Introduction to Finance

PGDM 2009 – 2011 Batch

Session 3 – Cash Flow


Statements
Statement Use

• Internal users
– Determine dividend policy
– Evaluate cash generated by operations
– Review investing and financing policy
• External users
– Assess firm’s ability to increase dividends
– Assess firm’s ability to pay debt from operations
– Assess firm’s relationship of cash from operations
to total cash

Chapter 10, Slide #2


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Statement Structure

Cash flows from operations


+ Cash flows from investing activities
+ Cash flows from financing activities
= Change in cash
+ Beginning cash balance
= Ending cash balance

Supplemental disclosure: non-cash financing and


investing activities

Chapter 10, Slide #3


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Operating Activities

The cash effects of transactions and other


events that enter into the determination of net
income:
Cash inflows from Cash outflows for
• Sale of goods or • Payments for
services acquisitions of inventory
• Returns on loans • Payments to employees
(interest) • Payments for taxes
• Return on equity • Payments for interest
securities (dividends) • Payments for other
expenses
Chapter 10, Slide #4
Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Investing Activities

Lending money and collecting on those loans


and acquiring and selling investments and
productive long-term assets:
Cash inflows from Cash outflows for
• Receipts for loans • Loans to other entities
collected • Investment in debt or
• Sales of debt or equity equity securities
securities • Purchase of plant,
• Sales of plant, property, property, and
and equipment equipment

Chapter 10, Slide #5


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Financing Activities

Borrowing and repaying long-term loans;


issuing equity securities; payment of
dividends to shareholders:
Cash inflows from Cash outflows for
• Sale of equity securities • Payment of dividends
• Sale of bonds, • Reacquisition of capital
mortgages, notes, and stock
other short- and long- • Payment of amounts
term borrowings borrowed

Chapter 10, Slide #6


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Cash Flows From Operations

• Alternative presentations:
• Direct method
– Presents the income statement on a cash basis
– Encouraged by FASB 95
– Supplemental information required: reconciliation of net
income to cash provided by operations
• Indirect method
– Adjusts net income for items that affected net income but did
not affect cash
– Supplemental information required: cash paid for income
taxes and for interest

Chapter 10, Slide #7


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Cash Flows From Operations:
Direct Method

Cash flows from operatio


Cash received from
Cash paid to suppl
Interest received
Interest paid (net o
Presents the income statement on a cash basis

Income taxes paid


Chapter 10, Slide #8
Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Cash Flows From Operations:
Indirect Method

Cash flows from operatio


Net earnings
Provision for depre
Provision for allowa
Deferred income ta
Adjusts net income for items that affected net income
but did not affect cash
Loss on property, p
Chapter 10, Slide #9
Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Cash Flows From Operations

Cash flows from Direct

CashCash
flows fromrece
operat
Net earnings
Cash
Indirect
paid
Provision for dep
Chapter 10, Slide #10
Provision for allow
Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Cash Flows From Investing Activities

Cash flows from investing


Capital expenditure
Proceeds from pro
disposals
Net cash use
Chapter 10, Slide #11
Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Cash Flows From Financing Activities

Cash flows from financing


Net proceeds from
commercial pap
Proceeds from issu
Dividends paid
Net cash used in
Chapter 10, Slide #12
Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Statement of Cash Flows – Direct Method
(supplemental disclosures not illustrated)
OPERATING ACTIVITIES
Cash received from customers $ 370,000
Cash paid to suppliers and employees (310,000)
Interest received 10,000
Interest paid (4,000)
Income taxes paid (15,000)
Net cash provided (used) by operating activities 51,000
INVESTING ACTIVITIES
Capital expenditures (30,000)
Proceeds from property, plant, and equipment
disposals 6,000
Net cash provided (used) by operating activities (24,000)
FINANCING ACTIVITIES
Net proceeds from repayment of commercial paper (4,000)
Proceeds from issuance of long-term debt 6,000
Dividends paid (5,000)
Net cash provided (used) by financing activities (3,000)
Increase in Cash 24,000
Chapter 10, Slide #13
Beginning cash balance
Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. 8,000
Statement of Cash Flows – Indirect Method
(supplemental disclosures not illustrated)
OPERATING ACTIVITIES
Net earnings $ 40,000
Provision for depreciation 6,000
Provision for allowance for doubtful accounts 1,000
Deferred income taxes 1,000
Loss on property, plant, and equipment disposals 2,000
Changes in operating assets and liabilities:
Receivables increase (2,000)
Inventories increase (4,000)
Accounts payable increase 5,000
Accrued income taxes increase 2,000
Net cash provided (used) by operating activities 51,000
INVESTING ACTIVITIES
Capital expenditures (30,000)
Proceeds from property, plant, and equipment
disposals 6,000
Net cash provided (used) by operating activities (24,000)
FINANCING ACTIVITIES
Net proceeds from repayment of commercial paper (4,000)
Proceeds from issuance of long-term debt 6,000
Dividends paid (5,000)
Net cash provided (used) by financing activities (3,000)
Increase in Cash 24,000
Beginning cash balance 8,000
Ending cash balance $ 32,000
Alternative Cash Flow Analysis
Percent
Inflows Outflows Inflows Outflows
OPERATING ACTIVITIES
Cash received from customers $ 370,000 94%
Cash paid to suppliers and employees $ (310,000) 84%
Interest received 10,000 3%
Interest paid (4,000) 1%
Income taxes paid (15,000) 4%
Net cash provided (used) by operating activities 380,000 (329,000) 97% 89%
INVESTING ACTIVITIES
Capital expenditures (30,000) 8%
Proceeds from property, plant, and equipment
disposals 6,000 2%
Net cash provided (used) by operating activities 6,000 (30,000) 2% 8%
FINANCING ACTIVITIES
Net proceeds from repayment of commercial paper (4,000) 1%
Proceeds from issuance of long-term debt 6,000 2%
Dividends paid (5,000) 1%
Net cash provided (used) by financing activities 6,000 (9,000) 2% 2%
Changes in cash:
Total cash inflows (outflows) 392,000 (368,000) 100% 100%
Total cash outflow (368,000)
Increase in Cash $ 24,000

Chapter 10, Slide #15


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Financial Ratios and the Statement of
Cash Flows

• Statement of cash flows is relatively new


– Required presentation began in 1987
• Cash flow financial ratios were slowly
developed
• Traditional ratios relate balance sheet to
income statement

Chapter 10, Slide #16


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Operating Cash Flow/Current Maturities of
Long-Term Debt and Current Notes Payable
Operating Cash Flow
Current Maturities of Long-Term Debt
and Current Notes Payable

• Indicates a firm’s abilities to meet its current


maturities of debt
• Higher ratio indicates better liquidity

Chapter 10, Slide #17


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Operating Cash Flow to Total Debt
Operating Cash Flow
Total Debt

• Indicates a firm’s ability to cover total debt with


the yearly operating cash flow
• Conservative approach is to include all
possible balance sheet debt

Chapter 10, Slide #18


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Operating Cash Flow per Share
Operating Cash Flow - Preferred Dividends
Diluted Weighted Average
Common Shares Outstanding

• A better indication of a firm’s ability to make


capital expenditure decisions and pay
dividends than is earnings per share
• Does not reflect firm’s profitability
– Firms are prohibited from reporting this statistic in
financial statements or in the notes thereto

Chapter 10, Slide #19


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Operating Cash Flow to Cash Dividends
Operating Cash Flow
Cash Dividends

• Indicates a firm’s ability to cover cash


dividends with the yearly operating cash flow

Chapter 10, Slide #20


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Alternative Cash Flow

• No standard definition of cash flow


• Alternative definition
– Net income plus depreciation expense
– Less useful than the net cash flow from operating
activities

Chapter 10, Slide #21


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Procedures to Develop the Statement of
Cash Flows
Analyze all balance sheet accounts other than
cash and cash equivalents.
Increase Decrease
Current assets Operating outflow Operating inflow
Noncurrent assets Investing outflow Investing inflow
Current liabilities Operating inflow Operating outflow
Long-term liabilities Financing inflow Financing outflow
Stockholders’ equity Financing inflow Financing outflow

Chapter 10, Slide #22


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Procedures to Develop the Statement of
Cash Flows (cont’d)

1. Determine change in cash and cash


equivalents
2. Compute the change in all other balance
sheet accounts
3. Classify as operating, investing, and
financing

Chapter 10, Slide #23


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Procedures to Develop
Direct Operating Cash Flows

1. Operating section describes income statement


accounts as receipts or payments
2. Cash receipts
• From customers
• From other operating sources
1. Cash payments
• For merchandise
• To employees
• For other operating expenses

Chapter 10, Slide #24


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.
Procedures to Develop
Indirect Operating Cash Flows

1. Begin with net income


2. Eliminate gains and losses that relate to
investing and financing activities
3. Add back or deduct adjustments to change
accrual-based net income to cash basis
• Current noncash assets
• Current liabilities

Chapter 10, Slide #25


Copyright 2007 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.

Anda mungkin juga menyukai