Statement of Cash Flows_8_ by pptfiles

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									Statement of Cash Flows
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By the end of today’s class you should be able to……
– Identify the three sections of the SCF – Explain how the SCF differs from the I/S – Explain the relationship between the B/S and the SCF – Identify the two methods of presenting SCF

Statement of Cash Flows
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Cash flow is an important measure of LIQUIDITY and FINANCIAL FLEXIBILTY
– can the company raise new capital should investment opportunities arise? – will the company be able to meet its future debt payments? – will it be able to maintain or increase dividends? – will it be able to respond in economic downturns and reduce its leverage – is the firm effectively managing its cash?

SCF Format
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Cash Flow from operations
– – – – Collection of receivables Cash sales Payments to suppliers, employees Payments for interest Cash paid for new PPE Purchase of another company Cash received for the disposal of PPE Proceeds on sale of a division or subsidiary Cash received when debt is issued Cash received when shares issued Repayment of debt (Principal) cash paid for dividends Purchase of treasury stock

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Cash Flow from Investing
– – – –

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Cash Flow from financing
– – – – –

Deriving the SCF
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A = L + OE DA = DL + DOE Dcash + DOther Assets = DL + DOE Dcash = DL + DOE - DOther Assets SCF is a function of changes in ALL the B/S accounts Recall that the B/S changes as revenues and expenses are recorded, so the I/S ties into the SCF, too

Defining Cash
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Financial instruments with maturities of 90 days or less at the date of purchase
– GE: marketable securities with original maturities of 3 months or less are included in cash equivalents… – Fredericks of Hollywood: Highly liquidity debt instruments with a maturity of 3 months or less….

Direct Method
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A way of disclosing Cash Flow from operating activities:
– – – – Cash received from customers Cash paid to suppliers Cash paid for interest Cash paid for taxes

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Intuitively appealing. but costly to generate
– Most accounting systems don’t capture the nature of individual cash flows and so it is difficult to sort out each type at the end of the reporting period

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Few companies use this approach When used, a reconciliation to Net Income is required

SCF - Indirect Method
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More common way of disclosing Cash Flow from Operations Reconciles Net Income (Accrual basis) to Cash Flow from Operations Done by analyzing changes in operations related B/S accounts
– Accounts Receivable – Inventory – PPE, Others

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Difficult to interpret, but easy to construct

Example: Receivables
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Goal: Adjust sales to Collections
– Beg.A/R + Sales - Collections = End A/R – Collections = Sales – DA/R

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Sales is included in NI The SCF starts with NI and subtracts the change in A/R Example:

In practice….
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sometimes, it seems that the change in a balance sheet account doesn’t tie into the change reported on the SCF. Here’s why. Suppose a company “purchased” A/R during the year… Beg. A/R + Sales + Purchased A/R - Collections = End A/R Collections = Sales - DA/R + Purchased A/R The cash outflow associated with the purchase of A/R will be in the investing section ( as will that portion of the collections related to those A/R) Take home point: don’t expected the change in the B/S account to tie into the SCF every time especially if you notice an acquisition being undertaken Let’s try Albertsons

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Other issues
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Depreciation have to be determined using PPE and A/D Gains and Losses on PPE sales Amortization expense- intangible assets and deferred costs like bond issue costs Compensation thru stock options Post-retirement benefits- accruals and cash outflow Non-cash transactions
– – – – – Capital leases Non-monetary exchanges Refinancing of long-term debt Conversion of debt to equity Issuance of equity to retire debt

Other issues- continued
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Adjustments similar to depreciation
– Effect of premium and discount interest amortization – Effect of Deferred tax – Effect of equity method for investment – Effect of allowance for bad debts
» For indirect method CR=NI-Dnet A/R » For direct method CR = Sales – DA/R – w/o


								
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