22.9: Analyzing the Statement of Cash Flows Flashcards
What are the three main sections of the statement of cash flows, and what do they represent?
Operating Activities: Cash flows related to the company’s core business operations, including receipts from customers and payments to suppliers and employees.
Investing Activities: Cash flows from buying and selling long-term assets, such as property, plant, equipment, and investments.
Financing Activities: Cash flows related to raising and repaying debt, issuing or repurchasing shares, and paying dividends.
Why is it important to analyze operating cash flows?
Operating cash flows indicate whether a company can generate enough cash from its core operations to cover expenses, such as paying suppliers and employees.
They also show how sustainable the company’s cash flow generation is and whether the cash flow results from one-time events or deferred payments.
What factors should be considered when analyzing investing activities in the statement of cash flows?
The amount invested in new assets versus amounts gained from selling assets.
Whether investments are maintaining or expanding the company’s operating capacity.
The relationship between cash used for investments and cash generated from the company’s existing operations.
Depreciation and amortization expenses.
What can be learned from analyzing a company’s financing activities?
Financing activities show how a company raises funds (e.g., issuing debt or equity) and repays liabilities (e.g., loans, dividends).
It helps in understanding changes to the company’s capital structure and future claims on cash for debt repayments or dividends.
How can operating cash flows be manipulated?
Companies can manipulate operating cash flows by:
Securitizing Receivables: Selling receivables to boost cash inflows.
Capitalizing Expenses: Recording expenses like property or equipment as investments rather than expensing them, which increases reported operating cash flow.
Accelerating Collections: Collecting receivables early to show higher operating cash flow, even if actual operations have not improved.
What is the significance of “quality” in operating cash flow?
The quality of operating cash flow refers to whether the cash flow is sustainable and accurately reflects the company’s ongoing operations.
Low-quality cash flows might result from one-time events, manipulation, or unsustainable practices, whereas high-quality cash flows reflect consistent and repeatable business performance.
What should be considered when comparing cash flows between companies?
When comparing cash flows:
Consider the different accounting policies companies may use (e.g., lease accounting under ASPE vs. IFRS).
Compare how companies treat interest, overhead, and internal-use capitalized software, as these policies can affect operating, investing, and financing cash flow classifications.
What is a sensitivity analysis in cash flow analysis?
A sensitivity analysis evaluates how changes in assumptions affect a company’s cash flows.
For example, a small change in actuarial assumptions (e.g., pension calculations) can significantly impact the discounted value and the cash flows related to company obligations.
What is free cash flow and why is it important?
Free cash flow (FCF) is a non-GAAP financial measure that indicates a company’s financial flexibility.
It is calculated as net operating cash flows minus capital expenditures (CAPEX).
Importance: Free cash flow represents the cash a company can use for growth (e.g., investments, acquisitions), debt repayment, dividends, or stock repurchases, without jeopardizing ongoing operations.
How do companies calculate free cash flow?
The calculation may vary by company:
Some companies deduct all capital expenditures.
Others deduct only sustaining expenditures or current dividends.
The formula commonly used is:
Free Cash Flow = Net Operating Cash Flow - Capital Expenditures
Why do investors care about free cash flow?
Investors consider free cash flow a critical indicator of a company’s financial health and flexibility.
High free cash flow means the company can pursue new opportunities, expand, or weather economic downturns without endangering core operations.
