H analyze and interpret both reported and common-size cash flow statements;

Question 1

CF statement analysis begins with…

Answer 1

…CF statement analysis begins with an evaluation of the firms sources and uses of cash from operating, investing, and financing activities.

Question 2

Examples of unsustainable sources of financing

Answer 2

Issuing debt and securities to finance inventory and receivables, when operating cash flow is low

Question 3

Example of a CF charactertistic which a long-term and successful company must be able to generate

Answer 3

A long-term and sustainable company must be able to generate operating CF’s that > capital expenditures and provide a return to debt and equity holders

Question 4

Operating CF stuff

Answer 4

Know to ID the major determinants of Op. CF

Positive Op. CF can be generated by the firms ‘earnings-related activities’

‘positive’ op CF generated by decreasing Non-cash working capital (ex: liquidating inventory and receivables or increasing payables) is not sustainable because inventories and recievables cannot fall below zero and creditors will not extend credit indefinitely unless payments are made when due.

Operating CF - check it to check the quality of a firms earnings
Indicator of quality earnings: Stable relationship between NI and CFO (but can be affected by the business cycle and the firms life cycle)
Indicator of aggressive or (improper) accounting choices:Recognizing revenue too soon, delaying the recognition of expenses
Variability of CFO and NI

Question 5

CFI stuff (Growth indicators)(Cash generation)

Answer 5

Growth indicators: Increasing capital expenditures, use of cash

Indicator that firm means to save or generate cash: Reducing capital expenditures, selling capital assets in order to save or generate cash. <— may result in higher Cash Outflows in future as older assets are replaced or growth resumes.

Generating Op. CF that exceeds Capital Expenditures is desirable.

Question 6

CFF stuff (what it reveals)(Capital structure for debt repayment)

Answer 6

Reveals information about whether the firm is generating CF by issuing debt or equity.

Info about whether the firm is using cash to reply debt, reacquire stock, or pay dividends.

Question 7

Common-Size CF statement (includes example)(Common-size CF statement is used to analyze the CF statement)

Answer 7

Express each line item as a % of revenue

Express each inflow of cash as a % of total cash inflows, and each outflow of cash can be expressed as a % of total cash outflows.

Question 8

What makes a revenue based common-size CF statement useful?

Answer 8

It is useful for identifying trends and forecasting future CF

Because each line item of the CG statement is stated in terms of revenue, once future revenue is forecasted, CF’s can be estimated for those items that are tied to revenue.

Question 9

Common Size Ex:

Answer 9

Explain the decrease in triple Y’s total CF as a % of revenues

“Operating CF has decreased as a % of revenues” : Point out the obvious, step 1

Step 2, find the cuplrits. …the obvious is due to largley accumulating inventories, investing activities (specifically PPE) have (required an increased % of the firms CF’s)(effect…explanation)