Interpreting the financial statement and identifying relevant cashflows

Question 1

Why is it important to determine company cash flows?

Answer 1

a) an informative and analytical purpose: historical view of which components determine the cash flow of the company.

b) planning purpose: usually in the development of the business plan.

c) evaluation: FCFO and FCFE for the determination of market value

Question 2

main difference between income statement and cash flow statement

Answer 2

the latter uses monetary cash flows, and not costs/revenues

Question 3

What does the balance sheet represent?

Answer 3

Sources of capital: where resources have been drawn from

Uses of capital: where resources have been invested

Question 4

How do you compute CAPEX?

Answer 4

CAPEX = FixAss1 + Depreciation - FixAss0

Question 5

How do you compute “use of funds” (severance pay and risk provision)?

Answer 5

Use of funds = Fund0 + Provisions for the year - Fund1

namely: starting balance of the fund + any additional provisions set aside - ending balance of the fund.

Question 6

What are the differences between accounting and valuation purpose cashflow determination?

Answer 6

Graphs at page 23 (lecture 2)

Question 7

What is the planned variation in debt?

Answer 7

If we assume financial leverage to remain constant, it i correct to consider that the debt grows in proportion to the equity

Question 8

What are net extroardinary items?

Answer 8

Items not related to the usual business activity, like, for example:
- severance pay
- pension and other benefits
- forex gains/losses
- other expenses/income

Question 9

How do you compute “uses of funds”?

Answer 9

Risk Provisions and Severance Pay(1) - Risk Provisions and Severance Pay(0) -Severance Pay, Pension and other benefits, Provisions (all from the IS)

Question 10

What is net financing requirement / surplus?

Answer 10

Net cash flow from operations - change in equity participation - change in other long term financial assets

Question 11

How do you compute dividends paid?

Answer 11

Retained earnings 1 - (Retained earnings 0 + Net Income)

Question 12

How do you compute change in trade receivables?

Answer 12

Receivables 1 - Receivables 0 + Write Down of trade receivables

Question 13

Bottom up approach to compute EBITDA

Answer 13

Net Profit + Income Tax + Devaluations + Financial Charges - Financial Revenues + Depretiation and Provisions

Question 14

Top down approach to compute EBITDA

Answer 14

Net Revenue + change in inventories - purchase of goods and services - other operating costs - cost of labour + net extraordinary items