2Fund Analysis, Cash-FlowFund Analysis, Cash-FlowAnalysis, and Financial PlanningAnalysis, and Financial PlanningFlow of Funds (Sources and Uses)StatementAccounting Statement of Cash FlowsCash-Flow ForecastingRange of Cash-Flow EstimatesForecasting Financial Statements
3Flow of Funds StatementFlow of Funds StatementHas been replaced by the cash flowcash flowstatementstatement (1989) in U.S. auditedannual reports.A summary of a firm’s changes infinancial position from one period toanother; it is also called a sources anduses of funds statement or a statementof changes in financial position.
4Why Examine the FlowWhy Examine the Flowof Funds Statementof Funds StatementQUESTION?QUESTION?Why should we bother tounderstand a Flow of FundsStatement that is no longerrequired to appear in U.S.audited annual reports?
5Why Examine the FlowWhy Examine the Flowof Funds Statementof Funds StatementIncludes important noncash transactionswhile the cash flow statement does not.Is easy to prepare and often preferred bymanagers for analysis purposes over themore complex cash flow statement.Helps you to better understand the cashflow statement, especially if it is preparedunder the “indirect method.”The Flow of Funds Statement:The Flow of Funds Statement:
6Flow of Funds StatementFlow of Funds StatementAll of the firm’s investments andclaims against those investments.Extends beyond justbeyond just transactionsinvolving cashcash.What are “fundsfunds”?
7Sources andSources andUses StatementUses StatementThe letters labelingthe boxes stand forUUsesses, SSourcesources,AAssetsssets, andLLiabilitiesiabilities (broadlydefined). The pluses(minuses) indicateincreases(decreases) inassets or liabilities.AA LL- ++ -SSUU
13Adjusting the “Basic”Adjusting the “Basic”Sources and Uses StatementSources and Uses StatementThe following three slides areBasket Wonders’ Balance Sheetand Income Statement that wasdiscussed in Chapter 6.This information will be neededto adjust the “basic” Sourcesand Uses Statement.
14Basket Wonders’ BalanceBasket Wonders’ BalanceSheet (Asset Side)Sheet (Asset Side)a. How the firm stands ona specific date.b. What BW owned.c. Amounts owed bycustomers.d. Future expense itemsalready paid.e. Cash/likely convertibleto cash within 1 year.f. Original amount paid.g. Acc. deductions forwear and tear.Cash and C.E. $ 90Acct. Rec.cc394Inventories 696Prepaid Expdd5Accum Tax Prepay 10Current AssetsCurrent Assetsee$1,195$1,195Fixed Assets (@Cost)ff1030Less: Acc. Depr. gg(329)Net Fix. AssetsNet Fix. Assets $ 701$ 701Investment, LT 50Other Assets, LT 223bBasket Wonders Balance Sheet (thousands) Dec. 31, 2003Basket Wonders Balance Sheet (thousands) Dec. 31, 2003a
16Basket Wonders’Basket Wonders’Income StatementIncome Statementa. Measures profitabilityover a time period.b. Received, or receivable,from customers.c. Sales comm., adv.,officer’s salaries, etc.d. Operating income.e. Cost of borrowed funds.f. Taxable income.g. Amount earned forshareholders.Net Sales $ 2,211Cost of Goods Soldbb1,599Gross Profit $ 612SG&A Expensescc402EBITd$210 Interest Expensee59 EBTff$151 Income Taxes 60EATg$ 91Cash Dividends 38Increase in REIncrease in RE $ 53$ 53Basket Wonders Statement of Earnings (in thousands)Basket Wonders Statement of Earnings (in thousands)for Year Ending December 31, 2003for Year Ending December 31, 2003a
17Adjusting the “Basic”Adjusting the “Basic”Sources and Uses StatementSources and Uses StatementRecognize Profits and DividendsRecognize Profits and DividendsChange in retained earnings is composedof profits and dividends.Source: Net Profit $91Less Use: Cash Dividends 38(Net) Source: Incr., R.E.(Net) Source: Incr., R.E. $53$53
18Adjusting the “Basic”Adjusting the “Basic”Sources and Uses StatementSources and Uses StatementRecognize Depreciation and GrossRecognize Depreciation and GrossChanges in Fixed AssetsChanges in Fixed AssetsChange in net fixed assets is composedof depreciation and fixed assets.Source: Depreciation $ 30Less Use: Add. to F.A. 100(Net) Use: Incr., Net F.A.(Net) Use: Incr., Net F.A. $ 70$ 70
19SOURCESSOURCESFunds provided by operationsNet Profit $ 91Depreciation 30Decrease, Accounts Receivable 16Increase, Long-Term Debt 77Decrease, Cash + Cash Equivalents 10$224$224Sources and UsesSources and UsesStatement (Sources Side)Statement (Sources Side)
20USESUSESDividends $ 38Additions to fixed assets 100Increase, Inventories 80Increase, Accrued Taxes 1Decrease, Notes Payable 5$224$224Sources and UsesSources and UsesStatement (Uses Side)Statement (Uses Side)
21Analyzing the SourcesAnalyzing the Sourcesand Uses Statementand Uses StatementUsesUsesPrimarily throughan increase ininventories andexpenditures oncapital assets.SourcesSourcesPrimarilythrough netprofit fromoperations andlong-term debtincreases.
22Statement of Cash FlowsStatement of Cash Flowsoperating activitiesoperating activities,investing activitiesinvesting activities, andfinancing activitiesfinancing activities.This statement reports cash inflowsinflowsand outflowsoutflows based on the firm’sA summary of a firm’s paymentsduring a period of time.
23Statement of Cash FlowsStatement of Cash FlowsCash Flow from Operating ActivitiesShows impact of transactions notdefined as investing or financingactivities.These cash flows are generally the casheffects of transactions that enter into thedetermination of net income.
24Cash Flow FromCash Flow FromOperating ActivitiesOperating ActivitiesCash InflowsCash InflowsFrom sales of goods or servicesFrom interest and dividend incomeCash OutflowsCash OutflowsTo pay suppliers for inventoryTo pay employees for servicesTo pay lenders (interest)To pay government for taxesTo pay other suppliers for otheroperating expenses
25Cash Flow FromCash Flow FromOperating ActivitiesOperating ActivitiesIt would seem more logical to classifyinterest and dividend income as an“investing” inflow, while interest paidcertainly looks like a “financing”outflow.But, the U.S. Financial Accounting StandardsBoard -- by a slim 4 to 3 vote -- classified theseitems as “operating” flows.
26Statement of Cash FlowsStatement of Cash FlowsCash Flow from Financing ActivitiesCash Flow from Financing ActivitiesShows impact of all cash transactionswith shareholders and the borrowingand repaying transactions with lenders.Cash Flow from Investing ActivitiesCash Flow from Investing ActivitiesShows impact of buying and sellingfixed assets and debt or equitysecurities of other entities.
27Cash Flow FromCash Flow FromInvesting ActivitiesInvesting ActivitiesCash InflowsCash InflowsFrom sale of fixed assets (property, plant,equipment)From sale of debt or equity securities (otherthan common equity) of other entitiesCash OutflowsCash OutflowsTo acquire fixed assets (property, plant,equipment)To purchase debt or equity securities (otherthan common equity) of other entities
28Cash Flow FromCash Flow FromFinancing ActivitiesFinancing ActivitiesCash InflowsCash InflowsFrom borrowingFrom the sale of the firm’s own equitysecuritiesCash OutflowsCash OutflowsTo repay amounts borrowedTo repurchase the firm’s own equitysecuritiesTo pay shareholders dividends
29Indirect Method --Indirect Method --Statement of Cash FlowsStatement of Cash FlowsCash Flow from Operating ActivitiesCash Flow from Operating ActivitiesNet Income $ 91Depreciation 30Decrease, accounts receivable 16Increase, inventories ( 80)Increase, accum. tax prepay ( 1)Net cash provided (used) byNet cash provided (used) byoperating activitiesoperating activities $ 56$ 56
30Indirect Method --Indirect Method --Statement of Cash FlowsStatement of Cash FlowsCash Flow from Investing ActivitiesCash Flow from Investing ActivitiesAdditions to Fixed Assets $(100)Net cash provided (used) byNet cash provided (used) byinvesting activitiesinvesting activities $(100)$(100)
37Direct Method --Direct Method --Statement of Cash FlowsStatement of Cash FlowsIncrease (decrease) in cashIncrease (decrease) in cashand cash equivalentsand cash equivalents $ ( 10)$ ( 10)Cash and cash equivalents, 2002 100Cash and cash equivalents, 2002 100Cash and cash equivalents, 2003 $ 90Cash and cash equivalents, 2003 $ 90Supplemental cash flow disclosuresNet Income $ 91Depreciation 30Decrease, accounts receivable 16Increase, inventories ( 80)Increase, accum. tax prepay ( 1)Net cash provided (used) byNet cash provided (used) byoperating activitiesoperating activities $ 56$ 56
38Cash Flow ForecastingCash Flow ForecastingDetermine the future cash needs of the firmPlan for the financing of these needsExercise control over cash and liquidity ofthe firmA Cash BudgetCash Budget is a forecast of a firm’s futurecash flows arising from collections anddisbursements, usually on a monthly basis.The financial manager is better able toThe financial manager is better able to:
39The Sales ForecastThe Sales ForecastSales representatives project salesfor the period in question (salesunder their control or management).Sales projections are screened andconsolidated for product lines.Product line sales projections areconsolidated into a single forecast.Internal Sales ForecastInternal Sales Forecast
40The Sales ForecastThe Sales ForecastEconomists project overalleconomic and business trends thatwill affect the firm.Expected market share is projectedfor current and new product lines.Product line sales projections areconsolidated into a single forecast.External Sales ForecastExternal Sales Forecast
41BW’s Cash Flow ForecastBW’s Cash Flow ForecastLisa Miller has finalized a cash flowforecast for the first six months of 2004.Lisa is expecting 90% of monthly saleswill be credit sales with 80% of creditsales collected in 30 days, 20% in 60days, and no “bad debts.”Hint: The cash flow forecast will be usedin forecasting the financial statementslater in this chapter.
42Collections and OtherCollections and OtherCash Receipts (Thousands)Cash Receipts (Thousands)SALESSALES NOV DEC JAN FEBCredit Sales, 90%Credit Sales, 90% $193 $212 $154 $135$193 $212 $154 $135Cash Sales, 10%Cash Sales, 10% 2121 2424 1717 1515Total Sales, 100%Total Sales, 100% $214 $236 $171 $150$214 $236 $171 $150CASH COLLECTIONSCASH COLLECTIONSCash sales, currentCash sales, current $ 17 $ 15$ 17 $ 1580% of last month’s 169 123credit sales20% of 2-month-old 39 42credit salesTotal sales receiptsTotal sales receipts $225 $180$225 $180
50Range ofRange ofCash-Flow EstimatesCash-Flow EstimatesExamine factors that may influence cashcashdisbursementsdisbursements such as changes in thestate of the economy that impactoperations, capital expenditures, anddividend payments.Examine factors that may influence cashcashreceiptsreceipts such as changes in the state ofthe economy that influence consumerbuying decisions and pricing strategies.
53Summary of the RangeSummary of the Rangeof Cash-Flow Estimatesof Cash-Flow EstimatesAllows examination of therelevant factors which maygenerate uncertainty regardingfuture cash flows.Enables management to betterplan for contingencies that willarise than using a single-pointestimate of monthly cash flows.
54ForecastingForecastingFinancial StatementsFinancial Statements(1) Forecasted Income Statement(1) Forecasted Income Statement(2) Forecasted Balance Sheet(2) Forecasted Balance SheetExpected future financial statementsbased on conditions thatmanagement expects to exist andactions it expects to take.Considerations
55Forecasting BW’sForecasting BW’sIncome StatementIncome StatementLisa Miller is forecasting the incomestatement for 2004. She estimates that salessalesfor the 6 months ended June 30 will be$1,222,000$1,222,000. COGSCOGS are estimated from theaverageaverage of years 2001 through 2003of years 2001 through 2003. Selling,Selling,general, and administrative costsgeneral, and administrative costs areforecasted at $34,000 per month$34,000 per month, while theincome tax rate is assumed equal to 40%.Cash dividendsCash dividends and interest expenses areexpected to remain constantremain constant.
56Basket Wonders’ ForecastedBasket Wonders’ ForecastedIncome StatementIncome Statementa. From sales budget.b. Average of 68.7, 71.3,and 72.3% multiplied bynet sales.c. $34,000 x 6 months.d. Assumed to be $29,000.e. Did not change. Six (6)months of dividends =(.5)($38,000) = $19,000.Net SalesNet Salesaa$ 1,222$ 1,222Cost of Goods SoldCost of Goods Soldbb865865Gross Profit $ 357SG&A ExpensesSG&A Expensescc204204EBIT $153 Interest Expensed29 EBT $124 Income Taxes 50EAT $ 74Cash DividendsCash Dividendsee1919Increase in REIncrease in RE $ 55$ 55Basket Wonders Forecasted Statement of Earnings (inBasket Wonders Forecasted Statement of Earnings (inthousands) for Six Months Ending June 30, 2004thousands) for Six Months Ending June 30, 2004