Cash Flow Statement

Cash Flow Statement ptobifrd ingotmsyion beyond that available from the income statement, which is based on accrual, rather than cash, accounting. The cash flow statement provides:

1. Information about a company's cash receipts and cash payments during an accounting period.
2. Information about a company's opearing, investing, and financing activities.
3. An understanding of the impact of accrual accounting events on cash flows.

An analyst can use the statement of cash flows to determine whether:

1. Regular operations generate enough cash to sustain the business.
2. Enough cash is generated to pay off existing debts as they mature.
3. The firm is likely to need additional financing
4. Unexpected obligations can be met.
5. The firm can take advantage of new business opportunities as they raise.

Items on the cash flow statement come from 2 source
1. Income statement items.
2. Changes in balance sheet accounts.

Cash Flow Classification:

Operating cash flow + investing cash flow + financing cash flow = change in cash balance + beginning cash balance = ending cash flow

Beginning inventory balance + inventory purchase - COGS = Ending inventory balance

Cash paid for new asset = ending gross assets + gross cost of old assets sold - beginning gross assets

Cash from asset sold = book value of the asset + gain/ - losses on sale

Net cash flows from creditors = new borrowings - principal amounts repaid

Net cash flows from shareholders = new equity issued - share repurchases - cash dividends paid

The steps in calculating CFO under the indirect method can be summarized as:

1. Begin with net income.
2. Subtract gains or add losses that resulted from financing or investing cash flows (such as gains from sale of land).
3. Add back all noncash charges to income (such as depreciation and amortization) and subtract all noncash components of revenue.
4. add or subtract changes to balance sheet operating accounts as follows:

• Increases in the operating asset accounts (uses of cash) are substracted, while decrease (sources of cash) are added.
• Increases in the operating liability accounts (sources of cash) are added, while decreases (use of cash) are subtracted.

Converting indirect method to direct method:

Cash collections from customers:

1. Begin with net sales from the income statement.
2. Subtract (add) any increase (decrease) in the accounts receivable balance as reported in the indirect method.
3. Add (subtract) an increase (decrease) in unearned revenue.

Csh payments to suppliers:

1. Begin with COGS as reported in the income statement.
2. If depreciation and/or amortization have been included in COGS (they increase COGS), these items must be added back to COGS when computing the cash paid to suppliers.
3. Reduce (increase) COGS by any increase (decrease) in the accounts payable balance as reported in the indirect method.
4. Add (subtract) any increase (decrease) in the inventory balance as disclosed in the indirect method.
5. Subtract an inventory write-off that occurred during the period.

Free Cash Flow to Firm (FCFF) is the cash available to all investors, both equity owners and debt holders.

FCFF = NI + NCC + [Int * (1- tax rate)] - FCInv - WCInv

• NI = net income
• NCC = noncash charges (depreciation and amortization)
• Int = interest expense
• FCInv = fixed capital investment (net capital expenditures)
• WCInv = working capital investment

FCFF = CFO + [Int * (1 - tax rate)] - FCInv

Free Cash Flow to Equity (FCFE) is the cash flow that would be available for distribution to common shareholders.

FCFE = CFO - FCInv + Net borrowing (debt issued - debt repaid)

Performance ratio
Cash flow-to-revenue = CFO / Revenue

Cash return-on-assets = CFO / average total assets

Cash return-on-equity = CFO / average total equity

Cash-to-income = CFO / Operating income

Cash flow per share = (CFO - preferred dividends) / (weighted average number of common shares)

Coverage ratios
Debt coverage = CFO / total debt

Interest coverage = (CFO + interest paid + tax paid) / interest paid

Reinvestment = CFO / cash paid for long term assets

Debt payment = CFO / cash long-term debt repayment

Dividend payment = CFO / dividends paid

Investing and Financing = CFO / cash outflows from investing and financing activities