Statement of Cash Flow - Download as PowerPoint

							     Statement of Cash Flow
Cash flow from Operating activities: （营运活动）
  cash receipts from customers
  cash disbursed to:
        suppliers of merchandise
        employees for salaries

Cash flow from investing activities: （投资活动）
  purchase of buildings, equipments, plants
  proceeds (进帐）from sales of long term assets

Cash flow from financing activities: （融资活动）
  borrowing/repay long term debts
  issuing new shares
   Overview of the Statement of Cash Flows


In AOL 2000 balance sheet, cash and cash equivalent
   increased from $936 millions to $2,490 millions. How?

The statement of cash flows …
(a) explains the reasons for a change in cash.
(b) classifies the reasons for the change as an operating,
   investing or financing activity.
(c) reconciles net income with cash flow from
   operations.
Montgomery Ward b.f. bankrupt
      The difference between earnings and cash flows

1.   I/S Explain change in      1.   SCF explain change in cash
     retained earnings               and cash equivalent
2.   I/S is accrued-based       2.   N/A
3.   I/S recognize property     3.   SCF emphasize “actual
     rights                          possessment（拥有）”
4.   I/S require estimates      4.   SCF does not
5.   I/S is an opinion
                                5.   SCF is a fact
6.   I/S is prone to (易于）
     manipulation               6.   SCF is so to a much less
                                     degree
7.   Firms can survive a long
     string（长串） of negative     7.   Firms go bankrupt with a
     earnings                        long string of negative
                                     cash flows (outflow)
     Cash flow equation

 A=L+E
ΔA =ΔL+ΔE
Δcash +Δnon-cash A = ΔL+ ΔE
Δcash +Δ current A (other than cash) +Δnon-current A=
  Δcurrent L+ Δnon-current L+ ΔE

Δcash = Δcurrent L+ Δnon-current L+ ΔE -Δ current A
  (other than cash) -Δnon-current A
  Cash flow from operation


Cash flows related to selling goods and services;
   that is, the principle business(主营业务) of the
   firm
The main source of payoffs to shareholders and
   creditors
The reason for the firms to exist
If firms do not in the long run generate more
   cash from operation than the returns of funds
   to shareholders and creditors, the firms go
   bankrupt
     Cash flow from operation-components

Cash collected from customers
Cash collected as interest (利息）on loans to others
Cash collected as dividends （股利）on investment on other
  firms’ stocks
Cash paid to suppliers
Cash paid to employees
Cash paid to other service providers: landlords, marketing
  agency, auditors, consultants, …
Cash paid to government
Cash paid to creditors as interest on borrowed money
    Cash flow from investing activities

Cash flows related to the acquisition or sale of non-
  current assets: investment, land, property, plants,
  equipments…
To maintain the current productivity of the operation, a
  firm must replace assets that they wear out (消耗）
To grow its operation, a firm must acquire additional
  assets
Old assets may be sold as they become obsolete (过
  时）, or as the firm change production
Investing activities thus provide resource to generate
  cash flow from operations
    Cash flow from investing activities-
    components

Cash received from sales of land, investment,
  property, plants and equipment

Cash paid to acquire land, investment, property,
  plants and equipment
  Cash flow from financing activities

Cash flows related to long-term liabilities and owners’
  equity
The source of cash to be used in investing and
  operating activities
Two sources: shareholders and creditors
This part of SCF also indicates how much cash the firm
  returns to its capital providers, i.e., cash distribution
  to shareholders and creditors

Note: short-term liabilities generated in operation, such
  as account payable, is not related to this category
   Cash flow from financing activities-
   components

Cash received from issuing corporate debts or
  taking up loans
Cash received from issuing common shares or
  preferred shares
Cash paid to repay debts or loans
Cash paid to repurchase shares
Cash paid to shareholders as dividends
Relations among the cash flows from the
three categories of activities



 CF            CF           CF
from          from         From
 Fin.          Inv.        Op.
 Act.          Act         Act.
    Free Cash Flow

= Cash flow from operating activities
  + Cash flow from investing activities

If positive, normal operation generates more cash that
   it consumes, such as the case of a stable firm
If negative, normal operation generates insufficient
   amount of cash to be self-sustaining, such as a
   growing firm
    Two methods to prepare the operating
    portion of SCF

Direct method of presentation calculates cash flow from
   operations by subtracting cash disbursements to supplies,
   employees, and others from cash receipts from customers.
The indirect method calculates cash flow from operations by
   adjusting net income for noncash revenues and expenses.
Most firms present their cash flows using the indirect
   method.
  Operating Cash Flows-Direct method

The direct method is simple and straight:
Cash collected from customers
Cash collected as interest (利息）on loans to others
Cash collected as dividends （股利）on investment on
  other firms’ stocks
Cash paid to suppliers
Cash paid to employees
Cash paid to other service providers: landlords,
  marketing agency, auditors, consultants, …
Cash paid to government
Cash paid to creditors as interest on borrowed money
   Indirect method Operating Cash Flow reconciles
   net income with cash flow from operation

Δcash = Δcurrent L+ Δnon-current L+ ΔE -Δ current
  A (other than cash) -Δnon-current A

              Op.

Δcash = [Δcurrent L -Δ current A (other than
  cash) ]+ [Δnon-current L+ ΔE] –[Δnon-current A]


     Fin.                               Inv.
 Indirect method Operating Cash Flow reconciles
 net income with cash flow from operation

Net Income is accrual-based, when we calculate
  net income, we do not care whether cash has
  been received or paid

But current assets and current liabilities
  accounts are impacted when we calculate net
  income, e.g., we debit account receivable and
  credit revenue when finishing a sales activity
  Indirect method Operating Cash Flow reconciles
  net income with cash flow from operation

So in the example above, net income is higher than
  cash flow from operation because this transaction
  increases net income by increasing revenues, but
  does not increase cash because we debit account
  receivable and no cash is collected yet.
Therefore, to get to the balance of cash from net
  income, we subtract the increase in account
  receivable account.
This procedure confirms to the cash equation in which
  increase (positive change) in current assets other
  than cash decrease cash flow from operation.
   Indirect method Operating Cash Flow reconciles
   net income with cash flow from operation

The indirect method:
Net income
+ depreciation
- Increase in current assets accounts

+ decrease in current assets accounts
- decrease in current liabilities accounts

+ increase in current liabilities accounts
= Cash flow from operation
Notes to financial statements- on cash flows
   Cash flow pattern for different firms
Cash flow        A         B       C          D
from:
Operation   $ (3)     $7         $ 15    $8
Investing   (15)      (12)        (8)      (2)
Financing   18        5           (7)      (6)
Net CF           0         0       0          0
             New,     Growing    Mature, Declining
            growing      less    stable    firm
              firm     rapidly    firm
     Is cash the king?


Cash is the ultimate payoffs to capital providers

Established finance theory told us the the value of a
  firm is the present value of all its future dividends
   Is cash the king?


Earnings do not always go hand-in-hand with cash
   flows
- Operational reason: a growing firm can have fast
   growth in earnings, but due to the expansion, it is
   consistently short of cash; a declining firm may have
   declining earnings but throw out large amount of
   cash due to lack of investing opportunities
- Earnings management reason:A firm may manage the
   non-cash earnings to increase earnings, but not to
   increase cash flow.
Is cash the king?-Sloan [1996] Accounting Review
Is cash the king?-Sloan [1996] Accounting Review
Is cash the king?-Sloan [1996] Accounting Review
Is cash the king?-Barth el al. (2001)
Investing Motto



You can pocket cash, but you can not pocket
  earnings!
            ---myself