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Financial Analysis And Reporting > Understanding Cash Flow Statements > Flashcards

Understanding Cash Flow Statements Flashcards

1
Q

The main components on the cash flow statement

A
  • operating activities
  • investing activities
  • financing activities
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2
Q

Operating activities are

A

the activities related to the normal operations of a company

  • cash inflows from sales, etc
  • cash outflows from buying inventory, salaries, operating expenses
  • payments and receipts related to TRADING securities (securities that are not bought as investments)
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3
Q

Investing activities are

A

are activities associated with the acquisition and disposal of long-term assets,
helpful in evaluating how much is being invested for the future

  • cash sale or purchase of PPE
  • cash payments and receipts related to INVESTMENT securities (not trading securities)
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4
Q

Financing activities are

A

are activities related to obtaining or repaying capital,
is the frim raising capital or repaying capital?

  • issuance or repurchase of a company’s own preferred or common stock
  • issuance or repayment of debt
  • dividend payments to shareholders
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5
Q

Compare the reporting differences between IFRS and GAAP in regard to interest paid/interest received and dividends paid/dividends received:

A

Cash Flow IFRS - activities reported as GAAP
Interest received Operating or investing Operating
Interest paid Operating or FINANCING Operating
Dividends received Operating or investing Operating
Dividends paid Operating or FINANCING FINANCING

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6
Q

Indirect Method of reporting

A
  • allowed by both IFRS and GAAP, but Direct is encouraged. GAAP requires a reconciliation of NI to CF Operating Activities regardless of the method used
  • starts with Net Income and makes adjustments for non-cash and non-operating items to arrive at Cash Flow from Operations
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7
Q

Direct Method of reporting

A
  • the encouraged format for both IFRS and GAAP. GAAP requires a reconciliation of NI to CF Operating Activities regardless of the method used
  • looks at the specific cash inflows and outflows to arrive at Cash Flow from Operating Activities
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8
Q

Ending Account Receivables formula:

A

= Ending AR = beginning AR + revenue - cash collected from customers

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9
Q

The presentation of Cash Flow from Investing Activities and Cash Flow from Financing Activities are presented the ________ under Direct/Indirect, while the Cash Flow from Operating Activities is presented __________

A
  • only CF Operating is presented differently
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10
Q

CF Operating Activities
Direct Method

what it is and rules to making adjustments

A
  • take each item from the income statement and convert it to its cash equivalent by removing the impact of accrual accounting

Rules:

  • Increase in assets is a use of cash ( - adjustment) (AR)
  • Decrease in assets is a source of cash ( + adjustment) (AR)
  • Increase in liability is a source of cash ( + adjustment) (unearned revenue)
  • Decrease in liability is a use of cash ( - adjustment) (unearned revenue)
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11
Q

CF Operating Activities
Indirect Method

what it is and rules to making adjustments

A

Shows how cash flow from operations can be obtained from reported net income as a result of a series of adjustments

Start with NI
+ non-cash charges (depreciation)
- gains resulting from financing or investing CF (ie gain on sale of a van)
+/- changes related to related B.S. operating accounts
a decrease in operating assets (source of cash) is added
an increase in operating assets (use of cash) is subtracted
an increase in current liabilities (source of cash) should be added
a decrease in current liabilities (use of cash) should be subtracted

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12
Q

An increase in A/R of $8m is a ________

A
  • a use of cash

- an increase to an asset item

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13
Q

An increase in A/P of $4m is a ______

A
  • source of cash

- an increase in a liability item

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14
Q

Cash from sale of equipment formula

Investing Cash Flow

A

= historical cost of equipment sold
- accumulated depreciation on equipment sold
+ gain on sale of equipment

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15
Q

Historical cost of equipment sold formula

A

= beginning balance
+ equipment purchased
- ending balance equipment

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16
Q

Accumulated depreciation on equipment sold formula

A

= beginning value of depreciation + depreciation expense - ending value of depreciation

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17
Q

Cash Flow from Financing are…

A 
- financing activities between the firm and the suppliers of capital. 
Suppliers of capital
- creditors
- bondholders
- shareholders
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18
Q

Cash Flow from Financing Activities: formulas:

A
  • Cash Flow from Financing
  • Net cash flow from creditors
  • Net cash flow from shareholders
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19
Q

Calculate Cash Flow from Financing (CFF)

A

CFF = net cash flow from creditors + net cash flow from shareholders

20
Q

Net cash flow from creditors formula:

A

= new borrowings - principal repaid

21
Q

Net cash flow from shareholders formula:

A

= new equity issued - shares repurchased - cash dividends

22
Q

A signal of poor earnings quality might be…

A
  • if a company has large NI but poor operating cash flow

- poor consistency of operating cash flows

23
Q

Common-size analysis of the CF Statement

A

two methods:
1. express each line item of cash inflow or outflow as a percentage of total inflows or outflows: inflows and outflows are broken out into different sections

  1. express each line item as a percentage of total revenue. which is useful in forecasting future cash flows.
    ie. Revenue = $10,000
    cash received from sale of equipment = $2000 & 20% of revenue
24
Q

Free Cash Flow to Firm (FCFF):

what it is and equation

A
  • The CF available to all the suppliers of capital to a firm after all operating expenses have been paid and necessary investments in working capital and fixed capital have been made

FCFF = NI + NCC + Int (1-t) - FCInvt - WCInvt

25
Q

Free Cash Flow to Equity (FCFE):

what it is and formula

A
  • the cash flow available to the company’s stockholders after all operating expenses and borrowing costs (P&I) have been paid and necessary investments in WC and fixed capital have been made

FCFE = CFO - FCinvt + net borrowing

26
Q

Cash Flow Statement Ratio categories:

A
  • Performance ratios (profitability)

- Coverage ratios (solvency)

27
Q

CF Performance ratios: 5

A
  • Cash flow to revenue
  • Cash return on assets
  • Cash return on equity
  • Cash to income
  • Cash flow per share
28
Q

Cash flow to revenue

- what it measures and formula

A
  • the operating cash generated per dollar of revenue

= CFO / net revenue

29
Q

Cash return on assets

- what it measures and formula

A
  • operating cash generated per dollar of asset investment

= CFO / average total assets

30
Q

Cash return on equity

- what it measures and formula

A
  • operating cash generated per dollar of owner investment

= CFO / avg Sh.O equity

31
Q

Cash to income

- what it measures and formula

A
  • Cash generating ability of operations

= CFO / operating income

32
Q

Cash flow per share

- what it measures and formula

A
  • operating cash on a per-share basis

= (CFO - preferred dividends) / number of common shares outstanding

33
Q

Coverage Ratios (liquidity): 6

A
  • debt coverage ratio
  • interest coverage ratio
  • reinvestment ratio
  • debt payment ratio
  • dividend payment ratio
  • investing and financing ratio
34
Q

Debt coverage

- what it measures and formula

A
  • the financial risk and financial leverage

= CFO / total debt

35
Q

Interest coverage ratio:

- what it measures and formula

A
  • The ability to meet interest obligations

= (CFO + interest paid + taxes paid) / interest paid

36
Q

Reinvestment ratio

- what it measures and formula

A
  • the ability to acquire assets with operating CF

= CFO / cash paid for long-term assets

37
Q

Debt payment ratio

- what it measures and formula

A
  • The ability to pay debts with operating CF

= CFO / cash paid for long-term debt repayment

38
Q

Dividend payment ratio

- what it measures and formula

A
  • the ability to pay dividends with operating CF

= CFO / dividends paid

39
Q

Investing and financing ratio

- what it measures and formula

A
  • the ability to acquire assets, pay debts, and make distributions to owners

= CFO / cash outflows from investing and financing activities

40
Q

Cash paid to suppliers formula

A

= COGS + ▲ inventory - ▲ accounts payable

41
Q

Interest expense formula:

A

= ending interest payable - interest paid - beg interest payable

42
Q

Ending receivables formula

A

= beg receivables + revenue - cash collected from customers

43
Q

Cash collected from customers formula

A

= revenue - ▲ AR

44
Q

Cash paid for operating expenses formula

A

= operating expenses - ▲ in pre-paid expenses - ▲ in accrued expenses

45
Q

Cash Flow from trading securities are _______

A
  • classified as operating activities

Financial Analysis And Reporting (12 decks)

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