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Statement of Cash Flows

Transcript: Statement of Cash Flows Cortez Lim Lumbres Gesmundo Sabile Tagle Villacorta Ratio Analysis Dividend Discount Model Vt = E(Dt+1) / (1+ k)1 + E(Dt+2) / (1+ k)2 + E(Dt+3) / (1+ k)3 +.... RULES: When a negative amount appears in the base ad a positive amount in the next period, we cannot compute a meaningful percentage change. When there is not amount for the base period, no percentage change can be computed. When the base period amount is small, a percentage change is computable but the number must be interpreted with caution because it can signal a large change. When an item has a value in the base period and none in the next period, the decrease is 100%. $8 / (1.06) + $8 / (1.06)2 + $8 / (1.06)3 + $100 / (1.06)3 = $105.35 Common Size Analysis Express line items in the financial statements as percentage. Also called vertical analysis given the up-down evaluation of accounts. Year-to Year Change Analysis – used in comparing financial statements over relatively short periods, two to three years. It has the advantage of presenting changes in absolute dollar amounts as well as in percentages. EQUITY VALUATION 3 Approaches Dividend Discount Model Free Cash Flow Model Residual Income Model 2 Types a. Year-to Year Change Analysis b. Index-Trend Analysis 3. Debt to equity ratio Debt financed by stockholders DTER = Total Liabilities/Total Stockholders Equity * more preferably low by creditors to stockholders more preferably high 3. Accounts Receivable Turnover Ratio measure liquidity of accounts receivable ACTR = Net Sales/Average Accounts Receivable *Accounts Receivable T/O in days - 365/Receivable Turnover Ratio 4. Inverntory Turnover Ratio Determine how many times a yr. inventory turns over Inventory Turnover Ratio = COGS/Ave. Inventory Financial Ratios used in cash flow statement: Cash Flow Adequacy Ratio ability to generate sufficient cash from operations to cover capital expenditures, investments in inventories and cash dividends. Three Year sum of cash from operations __________________________________________ Three year sum of capital expenditures, inventory additions and cash dividends Residual Income Model Residual Income defined as comprehensive net income minus a charge on beginning book value RIt = NIt – (k x BV t-1) 6. Operating Cash Flow / Cash Dividends ability to cover cash dividends with the yearly operating cash flow Operating Cash Flow __________________ Cash Dividends Cash Flow Analysis DEBT VALUATION Bt = (It +1) / (I+r)1 + (It +2) / (I+r)2 + (It +3) / (I+r)3 + ........ (It +n) / (I+r)n + F / (I + r)n Present Value Theory basis of valuation 2 types of info needed to value a security: *Expected future payoffs over the life of the security *Discount rate 5. Operating Cash Flow Per Share fund flow per common share outstanding Operating Cash Flow – Preferred Dividends ____________________________________________ Diluted Weighted Average Common Shares Outstanding Cash flow analysis – tool to evaluate the source and uses of funds Statement of Cash Flows –reveal assets acquired and how they are financed Free Cash Flow – cash available after subtracting cash from operations 5. Price Earnings Ratio Indicator of stock values PER = Market Price Per Share/ Earnings Per Share 6. Dividend Yield DY = Dividends per common share/ Market price per common share 7. Payout Ratios earnings that a company pays in dividends Dividend Payout Ratio = Common Dividends/ (Net Income Preferred Dividends) 3. Operating Cash flow / current maturities of long-term and current notes payable Operating Cash Flow ______________________________________ Current maturities of long-term and current notes payable Using dividend discount model On January 1, Year 1, company issues $100 of eight year bonds with a year-end interest (coupon) payment of 8% annum. On January 1, Year 6, we are asked to compute the value of this bond when the yield to maturity on these bonds is 6% per annum. 4. Operating Cash flow / Total Debt Operating Cash flow _________________ Total Debt C. Profitability Ratio to oversee if funds are being used efficiently * Users creditors, investors, managers 1. Return on Sales Represent the % of each sale that is left over ROS = Net Sales/Sales 2. Return on Total Assets measure how assets are efficiently used ROTA = Net Inc+ Int. Exp+Taxes ---------------------------------------- Average Total Assets Index-Trend Analysis – used in comparing financial statements that cover more than 3 periods. ( Current Year balance / Base Year balance ) x 100 Ratio expresses a mathematical relation between two quantities Factors Affecting Ratio: Economic Events Industry Factors Management Policies Accounting Method 2. Cash Reinvestment Ratio measure of the percentage of investment in assets Operating cash flow – dividends ________________________________________ Gross Plant + investment + other assets + working capital 3. Return on Common Stockholder Equity The return stockholders receive on the investment ROSE = Net Income/Shareholders 4.

Statement of Cash Flows

Transcript: A cash flow statement is therefore broken down into three categories: Operating Investing Financing So what's the point in having a statement of cash flows? Assess the entity's ability to generate positive future net cash flows, meet its obligations, and pay dividends Assess the entity’s needs for external financing Assess the reasons for differences between net income and associated cash receipts and payments Assess the effects on an entity's financial position of both its cash and noncash investing and financing transactions during the period Quick Review: What are the different sections of a statement of cash flows? ASC 230 Composition of Operating Activities in the Indirect Method Net Cash Flow from Investing Activities As its name implies, the objective of the cash flow statement is to report on cash flows, not transactions and events without cash flows. Common Income/Expense Items that are included in Investing or Financing Activities: EXAMPLE - INDIRECT METHOD Open the excel file called Cash Flow Worksheet Example You'll be working primarily on the Cash Flow Worksheet Tab Link ending balance sheet to Cash Flow worksheet - opening balances are already linked Account for the change in all balance sheet accounts during the year Use Equity Statement as well as PPE and Debt roll forward schedules Assume there were no write offs of Accounts Receivable during the year. Compute cash paid for interest and cash paid for taxes Included in accrued expenses is accrued interest of $21,477 and $16,666 at December 31, 2015 and 2014, respectively. Assume the dividend of $240k was accrued and not paid during the year. (Just assume it is included in accrued expenses) Gain/Loss on Sale of PPE Gain/Loss on Sale of Investments Gain/Loss from Life Insurance Proceeds Gain/Loss from Extinguishment of Debt Interest that Accrues Into Principal Balance of Note Payable Report Financing and Investing Activities at Gross Amounts Line of Credit activity may be shown net Disclose Noncash Financing and Investing Activities Disclose income taxes paid Disclose interest paid Disclose capitalized interest (if any) Always Double Check Your Work 1. How was this Company able to maintain positive operating cash flows while the income statement indicates they had operating losses of $5.7mm? 2. How was this Company able to pay for $2.6mm in capital expenditures when it only generated $242,020 in operating cash flow? Depreciation and Amortization Deferred Income Tax Expense/Benefit Stock Compensation Bad Debt Expense Adjustments to Inventory Reserves 1. Proceeds from disposition of property, plant and equipment or other productive assets. INVESTING 2. Cash flows that generally involve the production and distribution of goods or provision of services. OPERATIONS 3. Proceeds from issuing equity securities, such as common stock. FINANCING 4. Repayments of amounts borrowed, including short-term and long-term debt, seller-financed debt and capitalized lease obligations. FINANCING 5. Collection of principal on loans to other entities. INVESTING 6. Converting debt to equity. NON-CASH ITEM - DISCLOSED SEPARATELY AT BOTTOM OF CASH FLOW 7. Payments to employees for compensation or payments to other vendors for other goods and services. OPERATING 8. Cash receipts from lawsuit settlements, refunds from suppliers and insurance proceeds. OPERATING 9. Acquisition of materials for manufacture of goods for resale via long-term note payable. NON-CASH ITEM - DISCLOSED SEPARATELY AT BOTTOM OF CASH FLOW 10. Proceeds from issuing bonds, mortgages, and notes and other short or long-term borrowings. FINANCING 11. Proceeds from a loan, which was obtained from the bank. FINANCING 12. A dividend or distribution was paid. FINANCING 13. A dividend was declared but not paid as of year end. NON-CASH ITEM - DISCLOSED SEPARATELY AT BOTTOM OF CASH FLOW 14. Payment of loan fees. FINANCING 15. Interest payments made on outstanding debt. OPERATING 16. Rebates received from vendors. OPERATING 17. Rebates paid to customers. OPERATING 18. An employee exercises the option to buy stock. FINANCING 1971 - APB 19 required a third principal general purpose financial statement: The Statement of Changes in Financial Position 1987 - FAS 5 –mandated reporting of cash flows (rather than funds) in separate operating, investing, and financing sections 2009 - FAS 5 was codified into ASC 230 1. Proceeds from disposition of property, plant and equipment or other productive assets. 2. Cash flows that generally involve the production and distribution of goods or provision of services. 3. Proceeds from issuing equity securities, such as common stock. 4. Repayments of amounts borrowed, including short-term and long-term debt, seller-financed debt and capitalized lease obligations. 5. Collection of principal on loans to other entities. 6. Converting debt to equity. 7. Payments to employees for compensation or payments to other vendors for other goods and services. 8. Cash receipts from lawsuit

Statement of Cash Flows

Transcript: CASH FLOWS ALEX X CARLO X KAE Statement of TEAM MILLIE OUTLINE What is the Statement of Cash Flows? - Definition - Equations - Purpose Sections - Operating Activities - Investing Activities - Financing Activities Preparation Methods - Indirect Method - Direct Method Summary OUTLINE CASH FLOW STATEMENT CASH FLOW STATEMENT DEFINITION CASH FLOW STATEMENT Previously “Flow of funds statement” Shows where cash came from and how it was spent Reports why cash increased or decreased during the period Communicating link between the Income Statement and cash reported on the Balance Sheet CASH FLOW STATEMENT The Cash Flow Statement includes only inflows and outflows of cash and cash equivalent. Cash equivalents consist of short-term, highly liquid investments such as Treasury bills, commercial paper and money market funds. Excludes transactions that do not directly affect cash receipts and payments. Non-Cash activities are reported in footnotes ORGANIZING CFS To compare data from different companies, U.S, generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) require companies to follow prescribed rules. One of the rules are to organize the statement into secctions that report cash flows. EQUATIONS For Asset accounts Beginning balance + Debits – Credits = Ending balance For Contra-Asset Accounts (Accumulated depreciation) /Liability/Stockholder’s Equity Beginning balance – Debits + Credits = Ending Balance The two equations used when adjustments are needed: PURPOSE PURPOSE Predict future cash flows Evaluate management decisions Predict the ability to pay (for debts and dividends) Most essential to; - Potential Lenders and Creditors - Potential Investors - Company Shareholders - Potential employees/contractors SECTIONS CASH FLOW SECTIONS OPERATING Operating Activities Generate cash inflows and outflows related to revenue and expense transactions that affect the net income. Core business / revenue-generating activities Ex. marketing the products, administering payroll, maintaining facilities Generally, operating activities refer to those that involve current assets and current liabilities. “How much cash did we generate from the daily activities of the business?” Can determine whether a company is profitable or not? Cash activities related to net income. For example, Sales Revenue - Cost of Goods Sold -------------------------- Gross Profit - Operating Expenses -------------------------- Operating Profit/Loss Operating Activities Operating Activities Cash inflows: - Sale of goods or services - Collection of accounts - Interest from borrowers and cash dividends received Cash outflows: - Purchases of merchandise from suppliers - Salaries expense - Marketing expenses - Interest paid to lenders - Income taxes INVESTING Investing Activities Generate cash inflows and outflows related to acquiring or disposing non-current assets such as property, plant, and equipment, long-term investments and loans to another entity. Cash spent on investments in capital assets In general, investing activities include transactions that involve non-current assets. - CAPEX, PPE “Where does the company put its money for long-term purposes?” Cash inflows: Cash sales of property, plant, and equipment Cash sales of equity investments Cash outflows: Purchase of property, plant, and equipment Purchase of equity investments Investing Activities FINANCING Financing Activities Generate cash inflows and outflows related to borrowing from and repaying principal to creditors and completing transactions with the company's ownes. Includes a) Obtaining cash from issuing debt and repaying the amounts borrowed b) Obtaining cash from stockholders shares and repaying dividends. Changes in long-term liabilities and stockholder’s equity Usually associated with long-term liability & equity items Cash inflows: From sale of common stock From issuance of long-term debt (bonds & notes) Cash outflows To stockholders as dividends To redeem long-term debt or reacquire capital To owners as withdrawals Financing Activities METHODS PREPARATION METHODS DIRECT Direct Method Under this method, the income statement is resconstructed on a cash basis from top to bottom. Example: Cash collected from customers is listed instead of revenue Payments to suppliers are listed instead of cost of goods sold Direct Method Lists all of the major operating cash receipts and payments during the period by source Lists where the cash inflows came from, usually customers, and where the cash outflows went, typically employees, vendors, etc. INDIRECT Under this method, the net income is adjusted to a cash basis. It has an advantage over the direct method because it shows the reasons for any differences between net income and net cash by operating activities INDIRECT METHOD 1) Add depreciation charges to net income Basic Equation for Contra-Assets Accounts Beginning balance - Debits + Credits = Ending Balance $300 - $70 + Credits = $500 Credits = $500 - $300

Statement of Cash Flows

Transcript: Statement of Cash Flows Chapter 17 0 Learning Objectives 1 Discuss the usefulness and format of the statement of cash flows. 2 Prepare a statement of cash flows using the indirect method. 3 Analyze the statement of cash flows. 4 Prepare a statement of cash flows using the direct method. Learning Objective The statement reports the cash receipts, cash payments, and net change in cash resulting from operating, investing, and financing activities during a period. What is a Statement of Cash Flows? 1 Statement of Cash Flows Overview 1. The entities ability to generate future cash flows. 2. The entities ability to pay dividends. 3. The reasons for differences between net income and net cash provided operating activities. 4. The cash investing and financing transactions during the period. The statement is used to assess 4 main ideas Uses of Information Classification of Cash Flows 3 Main Activities Operating Activities Investing Activities Financing Activities Cash effects of transactions that create revenues and expenses. Lending money/ acquiring and disposing of investments. Obtaining cash from issuing debt and repaying the amounts borrowed. Type of Inflow/Outflow Companies prepare the statement of cash flows differently from the three other basic financial statements. The information to prepare this statement usually comes from three sources: Comparative balance sheets. Information in the comparative balance sheets indicates the amount of the changes in assets, liabilities, and stockholder's equity from the beginning to the end of the period. Current income statement. Information in this statement helps determine the amount of net cash provided or used by operating activities during the period. Additional information. Such information includes transaction data that are needed to determine how cash was provided or used during the period. OBJECTIVES 2 Preparation of Cash Flow Statement Direct Method The direct method shows operating cash receipts and payments. It is prepared by adjusting each item in the income statement from the accrual basis to the cash basis. The FASB has expressed a preference for the direct method but allows the use of either method. The direct method is more consistent with the objective of a statement of cash flows. Indirect Method Indirect Method The indirect method adjusts net income for items that do not affect cash. A great majority of companies (98%) use this method. Companies favor the indirect method for two reasons: (1) it is easier and less costly to prepare, and (2) it focuses on the differences between net income and net cash flow from operating activities. 3 Indirect Method Steps Step 1 Indirect Method Determine Net Cash Provided/Used by Operating Activities by Converting Net Income from an Accrual Basis to a Cash Basis Operating Activities Add back non cash expenses, such as depreciation expense and amortization expense. Deduct gains and add losses that resulted from investing and financing activities. Analyze changes to non cash current asset and current liability accounts. Step 2 Analyze Changes in Non current Asset and Liability Accounts and Stockholder's Equity Accounts and Record as Investing and Financing Activities, or as Non cash Investing and Financing Activities. Investing and Financing Activities Examples include increase in land, increase in buildings, increase in equipment, increase in bonds payable, increase in common stock, and increase in retained earnings. Step 3 Compare the Net Change in Cash on the Statement of Cash Flows with the Change in the Cash Account Reported on the Balance Sheet to Make Sure the Amounts Agree. Net Change in Cash The steps for preparing the Statement of Cash Flows are similar with both methods. The difference is concerning how operating activities are adjusted. Direct Method 4 Direct Method Steps Major Difference Operating activities presented through indirect method Operating activities presented through direct method Companies compute net cash provided by operating activities by adjusting each item in the income statement. Companies report only major classes of operating cash receipts and cash payments. Step 1 Major Classes of Cash Receipts and Payments Customer Cash Receipts Supplier Cash Payments Operating Expense Cash Payment Income Taxes Cash Payment Net cash provided by operating activities is intended to indicate the cash-generating capability of a company. However, net cash fails to take into account that a company must invest in new fixed assets just to maintain its current level of operations. Purpose of the Statement 5 Analysis Free Cash Flow Free cash flow describes the net cash provided by operating activities after adjustment for capital expenditures and dividends.

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