Unlocking Financial Statements - Day 4

Online Seminar
Day 4
July 22, 2010
Unlocking Financial Statements

Statement of Cash Flows
Understanding Financial Statements

Accrual Method
Records revenues as soon as the “sale” occurs
Records expenses as soon as the bill is received
IE, transactions enter the financial records when they occur, not when cash changes hands
Accrual method, therefore, shows “scores,” not real spendable dollars

Statement of Cash Flows
Record of cash provided by cash sources and of cash consumed by cash uses .

Cash Flows (cont.)
Information about use of cash
Information about investing and financing
Ability to continue as a going concern
Ability to generate future positive cash flows
Ability to meet obligations and pay dividends

Cash Flows
From operations
From investing
From financing

Flexibility
Companies have some flexibility in categories for entries.
Total change in cash, however, will not change.
Overwhelming majority of all accounting standards deal with balance sheet and income statement, not cash flows statement.

Cash and Cash Equivalents
The category Cash and Cash Equivalents shows how much “cash” the company had at the start or end of a period.
Note the changes in this category.

Free Cash
Powerful tool for making a company successful
Powerful indicator for investors
Cash that is left over after productive capacity is maintained or expanded
Permits expansion, paying down debt, buying back shares, etc.

Free Cash
Several ways to calculate it
Companies create their own models
Gross way to do it:
Cash from operating activities
Minus capital expenditures
Equals free cash flow

American Standard Model
Cash from operating activities
Minus capital expenditures
Plus proceeds from disposal of property
Plus proceeds from sale and leasebacks
Equals free cash flow

VF Model
Cash from operating
Minus cash used in investing

Finding Company’s Formula
Often requires you to do some digging in the 10-K

Unlocking Financial Statements - Day 4

by Reynolds Center for Business Journalism

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Unlocking Financial Statements - Day 4 Presentation Transcript