Financial Reporting & Analysis - Cash Flow Statements Flashcards
Definition: operating cash flows
Day to day activities that produce revenue. Also includes dealing or trading securities.
Definition: investing cash flows
Purchasing & selling long-term assets. Excludes: 1) cash and cash equivalents, 2) securities held for dealing & trading (even if not the primary business activity).
Definition: financing cash flows
Obtaining or repaying capital (FYI, indirect borrowing through accounts payable is an operating cash flow).
Interest received (IFRS vs. GAAP)
- IFRS: operating or investing
2. GAAP: operating
Interest paid (IFRS vs. GAAP)
- IFRS: operating or financing
2. GAAP: operating
Dividends received (IFRS vs. GAAP)
- IFRS: operating or investing
2. GAAP: operating
Dividends paid (IFRS vs. GAAP)
- IFRS: operating or financing
2. GAAP: financing
Bank overdrafts (IFRS vs. GAAP)
- IFRS: part of cash equivalents
2. GAAP: financing
Taxes paid (IFRS vs. GAAP)
- IFRS: generally ops, but can be financing or investing if tied to activity
- GAAP: operating
Format (IFRS vs. GAAP
- IFRS: direct encouraged, but indirect okay
2. GAAP: direct encouraged, but indirect okay
Direct method
shows specific operating flows that comprise the total. If using this method, indirect reconciliation required under GAAP.
Indirect method
Begins with net income and shows how operating flows are achieved through adjustments.
Formula: cash from customers
Revenue - increase accounts receivable
Formula: cash paid to suppliers
Costs of goods sold + increase inventory - increase in accounts payable
Formula: ending inventory
Beginning inventory + purchases - costs of goods sold
Formula: cash paid to employees
Salary & wage expense - increase in wage payable
Formula: ending salary payable
Beginning salary payable + salary expense - cash paid to employees
Formula: cash paid for other operating expense
other operating expense - decrease in prepaid expense - increase in accrued liabilities
Formula: cash paid for income taxes
Income tax expense - increase payable
Formula: cost of equipment sold
Beginning equipment balance + equipment purchased - end balance
Formula: accumulated depreciation of equipment sold
Beginning accumulated depreciation + depreciation expense - end accumulated depreciation
Formula: cash received from equip sold
Historical cost - accumulated depreciation of equipment sold + gain on sale
Formula: cash paid for dividends
Beginning retained earnings + net income - ending retained earnings
Indirect adjustments
Should add items to net income that would have reduced net income through accruals and subtract those that helped through accruals
Conversion of cash flows: indirect to direct
- Segregate net revenue into revenue and expense
- Remove any non-operating & non-cash items
- Convert accrual amounts to cash flow amounts by adjusting for working capital (i.e. cash paid to employees, suppliers, etc)
Cash flow analysis: step 1
- Determine major sources of cash. Can vary based on the company’s stage of growth.
- If ops cash flow is negative for a long time, will need to be fund by financing or investing, which is not sustainable indefinitely.
Cash flow analysis: step 2
- Operations: for a mature company operation cash flow should be > net income.
- Difference could indicate earnings quality (i.e. if much less cash, company may be using aggressive accounting.
Cash flow analysis: step 3
- Investing: evaluate each line-item. If major investments are made, how are those financed? Ops cash, selling assets? Does it make sense to sell those assets? etc.
Cash flow analysis: step 4
- Financing: company raising or paying down capital and what the nature of capital sources are.
Common size analysis: cash flow
Two methods:
- As a % of total cash inflows our outflows (if inflow or outflow).
- As a % of net income
Formula: free cash flow
Operating cash flow - capital expenditures
Formula: free cash flow to firm (FCFF)
- Net income + interest expense*(1-tax rate) - capital expenditures - working capital expenditures
- Cash flow from operations + interest expense*(1-tax rate) - capital expenditures
Formula: free cash flow to equity (FCFE)
- CFO - capital expenditures + net borrowing
2. Excess represents cash above fixed investments and repayment of debt that could be redistributed to investors.
Ratio: cash flow to revenue
Cash flow from operations / net revenue
Ratio: cash return on assets
Cash flow from operations / avg. total assets
Ratio: cash return on equity
Cash flow from operations / avg. shareholder’s equity
Ratio: cash to income
Cash flow from operations / operating income
Ratio: cash flow per share
(Cash flow from operations - preferred dividends) / # of common shares outstanding
Ratio: debt coverage
Cash flow from operations / total debt
Ratio: interest coverage
EBIT / Interest Expense
Ratio: reinvestment
Cash flow from operations / cash paid for LT assets
Ratio: debt payment
Cash flow from operations / cash paid for LT debt
Ratio: dividend payment
Cash flow from operations / dividends paid
Ratio: investing & financing
Cash flow from operations / cash outflows for investing & financing
