Understanding Cash Flow Statements Flashcards
The main components on the cash flow statement
- operating activities
- investing activities
- financing activities
Operating activities are
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)
Investing activities are
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)
Financing activities are
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
Compare the reporting differences between IFRS and GAAP in regard to interest paid/interest received and dividends paid/dividends received:
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
Indirect Method of reporting
- 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
Direct Method of reporting
- 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
Ending Account Receivables formula:
= Ending AR = beginning AR + revenue - cash collected from customers
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 __________
- only CF Operating is presented differently
CF Operating Activities
Direct Method
what it is and rules to making adjustments
- 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)
CF Operating Activities
Indirect Method
what it is and rules to making adjustments
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
An increase in A/R of $8m is a ________
- a use of cash
- an increase to an asset item
An increase in A/P of $4m is a ______
- source of cash
- an increase in a liability item
Cash from sale of equipment formula
Investing Cash Flow
= historical cost of equipment sold
- accumulated depreciation on equipment sold
+ gain on sale of equipment
Historical cost of equipment sold formula
= beginning balance
+ equipment purchased
- ending balance equipment
Accumulated depreciation on equipment sold formula
= beginning value of depreciation + depreciation expense - ending value of depreciation
Cash Flow from Financing are…
- financing activities between the firm and the suppliers of capital. Suppliers of capital - creditors - bondholders - shareholders
Cash Flow from Financing Activities: formulas:
- Cash Flow from Financing
- Net cash flow from creditors
- Net cash flow from shareholders
Calculate Cash Flow from Financing (CFF)
CFF = net cash flow from creditors + net cash flow from shareholders
Net cash flow from creditors formula:
= new borrowings - principal repaid
Net cash flow from shareholders formula:
= new equity issued - shares repurchased - cash dividends
A signal of poor earnings quality might be…
- if a company has large NI but poor operating cash flow
- poor consistency of operating cash flows
Common-size analysis of the CF Statement
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
- 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
Free Cash Flow to Firm (FCFF):
what it is and equation
- 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
Free Cash Flow to Equity (FCFE):
what it is and formula
- 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
Cash Flow Statement Ratio categories:
- Performance ratios (profitability)
- Coverage ratios (solvency)
CF Performance ratios: 5
- Cash flow to revenue
- Cash return on assets
- Cash return on equity
- Cash to income
- Cash flow per share
Cash flow to revenue
- what it measures and formula
- the operating cash generated per dollar of revenue
= CFO / net revenue
Cash return on assets
- what it measures and formula
- operating cash generated per dollar of asset investment
= CFO / average total assets
Cash return on equity
- what it measures and formula
- operating cash generated per dollar of owner investment
= CFO / avg Sh.O equity
Cash to income
- what it measures and formula
- Cash generating ability of operations
= CFO / operating income
Cash flow per share
- what it measures and formula
- operating cash on a per-share basis
= (CFO - preferred dividends) / number of common shares outstanding
Coverage Ratios (liquidity): 6
- debt coverage ratio
- interest coverage ratio
- reinvestment ratio
- debt payment ratio
- dividend payment ratio
- investing and financing ratio
Debt coverage
- what it measures and formula
- the financial risk and financial leverage
= CFO / total debt
Interest coverage ratio:
- what it measures and formula
- The ability to meet interest obligations
= (CFO + interest paid + taxes paid) / interest paid
Reinvestment ratio
- what it measures and formula
- the ability to acquire assets with operating CF
= CFO / cash paid for long-term assets
Debt payment ratio
- what it measures and formula
- The ability to pay debts with operating CF
= CFO / cash paid for long-term debt repayment
Dividend payment ratio
- what it measures and formula
- the ability to pay dividends with operating CF
= CFO / dividends paid
Investing and financing ratio
- what it measures and formula
- the ability to acquire assets, pay debts, and make distributions to owners
= CFO / cash outflows from investing and financing activities
Cash paid to suppliers formula
= COGS + ▲ inventory - ▲ accounts payable
Interest expense formula:
= ending interest payable - interest paid - beg interest payable
Ending receivables formula
= beg receivables + revenue - cash collected from customers
Cash collected from customers formula
= revenue - ▲ AR
Cash paid for operating expenses formula
= operating expenses - ▲ in pre-paid expenses - ▲ in accrued expenses
Cash Flow from trading securities are _______
- classified as operating activities
