SlideShare a Scribd company logo
1 of 53
Download to read offline
Chapter 5
Understanding Cash Flow Statements
Contents
 Compare cash flows from operating, investing, and
financing.
 Contrast cash flow statements prepared under IFRS and
US GAAP.
 Distinguish between the direct and indirect methods of
presenting cash from operating activities.
 Analyze and interpret both reported and common-size
cash flow statements.
 Calculate and interpret free cash flow to the firm, free
cash flow to equity, and performance and coverage cash
flow ratios.
Statement Structure
Cash flows from operations
+ Cash flows from investing activities
+ Cash flows from financing activities
= Change in cash
+ Beginning cash balance
= Ending cash balance
Supplemental disclosure: non-cash financing
and investing activities
Operating Activities (USGAAP)
Cash inflows from
 Sale of goods or
services
 Returns on loans
(interest)
 Return on equity
securities (dividends)
Cash outflows for
 Payments for
acquisitions of inventory
 Payments to employees
 Payments for taxes
 Payments for interest
 Payments for other
expenses
The cash effects of transactions and other events
that enter into the determination of net income:
Investing Activities (USGAAP)
Cash inflows from
 Receipts for loans
collected
 Sales of debt or equity
securities
 Sales of plant, property,
and equipment
Cash outflows for
 Loans to other entities
 Investment in debt or
equity securities
 Purchase of plant,
property, and
equipment
Lending money and collecting on those loans
and acquiring and selling investments and
productive long-term assets:
Financing Activities (USGAAP)
Cash inflows from
 Sale of equity securities
 Sale of bonds,
mortgages, notes, and
other short- and long-
term borrowings
Cash outflows for
 Payment of dividends
 Reacquisition of capital
stock
 Payment of amounts
borrowed
Borrowing and repaying long-term loans;
issuing equity securities; payment of
dividends to shareholders:
Item Operating Investing Financing
1. Payment of federal income taxes.
2. Dividend payments to shareholders.
3. Repayment of long-term debt.
4. Loans made to another company.
5. Collection of accounts receivable.
6. Salaries paid to employees.
7.Payment of interest on bond debt.
8. Dividends received from investments.
9. Cash paid to acquire treasury stock.
10. Purchase of equipment for cash.
Differences between IFRS and USGAAP
Statement of Cash Flows – An Example
B A T
90,000
$ 40,000
$ (24,000)
$
26,000
(48,000) (25,000)
13,000
(27,000)
15,000
$ 15,000
$ 15,000
$
Cash Flows of Competing Companies
all numbers in thousands
Cash provided (used) by operating
activities
Cash provided (used) by investing
activities:
Repayment of debt
Net increase (decrease) in cash
Proceeds from sale of operating
assets
Purchase of operating assets
Cash provided (used) by financing
activities:
Proceeds from issuance of debt
The Product life cycle & cash flows
A series of phases all products go through
The phases are often referred to as the:
 introductory phase
 growth phase
 maturity phase
 decline phase.
The phase a company is in affects its cash
flows.
Introductory phase & cash flows
To support asset purchases the company may
issue stock or debt. Expect:
 cash from operations to be negative
 cash from investing to be negative.
 cash from financing to be positive.
Growth phase & cash flows
The company is striving to expand its production
and sales.
Expect:
 small amounts of cash to be generated from operations
 cash from investing to be negative.
 cash from financing to be positive.
Maturity phase & cash flows
Sales and production level-off
Expect:
 cash from operations to exceed investing needs.
 cash from investing to be neutral.
 cash from financing to be negative.
Decline phase & cash flows
Sales and production decline
Expect:
 cash from operations to decline.
 cash from investing to possibly become positive.
 cash from financing to possibly become negative.
Impact of Product Life Cycle on Cash Flows
A B C D
Net cash from operating activities (60) 30 120 (10)
Net cash from investing activities (100) 25 30 (40)
Net cash from financing activities 70 (110) (50) 120
Net Income (40) 10 100 (5)
Point in Time
(in $ millions)
Matching scenarios of cash flows with phases of
the product life cycle.
How to use cash flows information?
Methods to prepare Statement of Cash Flows
Direct Method vs. Indirect Method
Different in calculating net cash flow from operating
activities:
 The DIRECT method deducts from operating cash
receipts the operating cash disbursements.
 The INDIRECT method adjusts net income for items
that affected reported net income but did not affect cash.
Jan. 31, 2020 Jan. 31, 2019 Jan. 31, 2018
Cash flows from operating activities:
Cash received from customers $ 48,892,924 $ 47,836,136 $ 42,981,601
Cash paid to vendors and employees (48,118,538) (47,263,258) (41,668,923)
Interest paid, net (87,886) (97,293) (86,544)
Income taxes paid (93,410) (95,450) (131,632)
Net cash provided by operating activities 593,090 380,135 1,094,502
Cash flows from investing activities:
Proceeds from sale of business, net of cash divested 0 8,985 0
Acquisition of businesses, net of cash acquired (209,923) (124,223) (2,249,849)
Expenditures for property and equipment (48,352) (40,995) (192,235)
Software and software development costs (36,470) (20,419) (39,702)
Other 4,491 4,943 2,567
Net cash used in investing activities (290,254) (171,709) (2,479,219)
Cash flows from financing activities:
Borrowings on long-term debt 300,000 0 1,008,148
Principal payments on long-term debt (345,177) (208,591) (861,394)
Cash paid for debt issuance costs (4,341) 0 (6,348)
Net repayments on revolving credit loans (9,005) (11,288) (16,028)
Payments for employee withholdings on equity awards (9,428) (7,102) (6,027)
Proceeds from the reissuance of treasury stock 1,660 1,771 1,543
Acquisition of noncontrolling interest (7,553) 0 0
Repurchases of common stock (170,191) (107,025) 0
Other 529 0 0
Net cash (used in) provided by financing activities (243,506) (332,235) 119,894
Effect of Exchange Rate on Cash and Cash Equivalents (17,087) (32,696) 94,860
Net increase (decrease) in cash and cash equivalents 42,243 (156,505) (1,169,963)
Cash and cash equivalents at beginning of year 799,123 955,628 2,125,591
Cash and cash equivalents at end of year 841,366 799,123 955,628
Consolidated Statement Of Cash Flows - USD ($) $ in
Thousands
12 Months Ended
Net
Income
Cash Flows
from Operating
Activities
Changes in current assets
and current liabilities.
+ Noncash
expenses such as
depreciation and
amortization.
Indirect Method
+ Losses and
- Gains
Use this table when adjusting Net
Income to Operating Cash Flows.
Change in Balance During Year
Increase Decrease
Current Subtract from net Add to net income.
Assets income.
Current Add to net income. Subtract from net
Liabilities income.
Indirect Method
Company B reported revenues of $60 million, total expenses of
$35 million, and net income of $15 million in the most recent
year. If accounts receivable were $32 million at the beginning of
the year and $15 million at the end of the year, how much cash
did the company receive from customers?
A . $33 million.
B . $60 million.
C . $77 million.
Company O reported cost of goods sold for the year of $150
million. Inventory declined from $40 million to $24 million.
Accounts payable decreased from $35 million to $25 million.
How much cash did the company pay to its suppliers during the
year?
A . $144 million.
B . $156 million.
C . $176 million.
Cash Flows from Operating Activities
(Indirect Method)
 Noncash expenses
 Nonoperating losses
 Decreases in current
assets
 Increases in current
liabilities
 Nonoperating gains
 Increases in current
assets
 Decreases in current
liabilities
Net Income
Additions Deductions
Net cash flow from operating activities
Net income is £132,000, accounts payable increased
£10,000 during the year, inventory decreased £6,000
during the year, and accounts receivable increased
£12,000 during the year. Under the indirect method,
what is net cash provided by operating activities?
(a) £102,000.
(b) £112,000.
(c) £124,000.
(d) £136,000.
The following data are available for Allen Clapp
Corporation.
Net income
Depreciation expense
Dividends paid
$2,000,000
400,000
600,000
Gain on disposal of land
Decrease in accounts receivable
Decrease in accounts payable
100,000
200,000
300,000
Net cash provided by operating activities is:
(a) $1,600,000.
(b) $2,200,000.
(c) $2,400,000.
(d) $2,800,000.
The following data are available for Orange Peels
Corporation.
Sale of land
Sale of equipment
$100,000
50,000
Issuance of ordinary shares 70,000
Purchase of equipment 30,000
Payment of cash dividends 60,000
Net cash provided by investing activities is:
(a) $120,000.
(b) $130,000.
(c) $150,000.
(d) $190,000.
The following data are available for Something Strange!
Increase in accounts payable
Increase in bonds payable
Sale of investment
Issuance of ordinary shares
Payment of cash dividends
€ 40,000
100,000
50,000
60,000
30,000
Net cash provided by financing activities is:
(a) €90,000.
(b) €130,000.
(c) €160,000.
(d) €170,000.
Evaluation of the sources and uses of cash
Step 1
• What are major sources and uses of cash flow? (operating,
investing, or financing activities?)
• Is operating cash flow positive and sufficient to cover capital
expenditures?
Step 2
• What are major determinants of operating cash flow?
• Is operating cash flow higher or lower than net income? Why?
Step 3
• Where is the cash coming from to cover investments?
• Why are assets being sold? What would be effects on the
company?
Step 4
• Is the company raising capital or repaying capital? Why?
• What are the nature of its capital sources?
2020 2019 2018
Net Income (8,885) 1,686 1,412
Net cash provided by (used in) operating activities (6,543) 3,815 3,533
Net cash used in investing activities (4,342) (2,243) (1,973)
Net cash provided by (used in) financing activities 10,994 (1,568) (1,672)
Net increase (decrease) in cash 109 4 (112)
Cash at beginning of the year 390 286 398
Cash at end of the year 499 290 286
American airlines group
Consolidated Statement of cash flows
2021 2020 2019
Net Income (12,965) (11,178) 2,537
Net cash provided by (used in) operating activities (6,759) (6,455) 8,819
Net cash used in investing activities (1,945) 3,353 (1,284)
Net cash provided by (used in) financing activities 8,766 1,798 (8,182)
Net increase (decrease) in cash 62 (1,304) (647)
Cash at beginning of the year 1,653 2,957 3,603
Cash at end of the year 1,715 1,653 2,956
Vietnamairlines
Consolidated Statement of cash flows
Common-size analysis of the statement of cash flows
Common-size analysis of the statement of cash flows
Common-size analysis of the statement of cash flows
Free cash flow
The excess of operating cash flow over capital expenditures is
known generically as free cash flow.
 Free cash flow to equity
(FCFE) is the cash flow
available to the company’s
common stockholders after
all operating expenses and
borrowing costs (principal
and interest) have been
paid and necessary
investments in working
capital and fixed capital
have been made.
 Free cash flow to the firm
(FCFF) is the cash flow
available to the company’s
suppliers of debt and equity
capital after all operating
expenses have been paid
and necessary investments
in working capital and fixed
capital have been made.
Apple free cash flow
Free cash flow
FCFF = CFO + Int(1 – Tax rate) - FCInv
FCFE = CFO – FCInv +(-) Net borrowing (Net debt repayment)
FCFF: Free cash flow to the firm
FCFE: Free cash flow to equity
CFO: Cash flow from operating activities
Int: Interest expense
FCInv: Fixed capital investment (capital expenditure)
Cash flow ratios
End of chapter 5

More Related Content

Similar to Chapter 5 - Cash flows - handout.pptx

Cash flow statement from ABTI presented by Md. Saiful Islam ACA
Cash flow statement from ABTI presented by Md. Saiful Islam ACACash flow statement from ABTI presented by Md. Saiful Islam ACA
Cash flow statement from ABTI presented by Md. Saiful Islam ACALatif Abdul
 
Statement of Cash Flows The Statement of Cash Flow, the fo.docx
Statement of Cash Flows The Statement of Cash Flow, the fo.docxStatement of Cash Flows The Statement of Cash Flow, the fo.docx
Statement of Cash Flows The Statement of Cash Flow, the fo.docxwhitneyleman54422
 
1. (TCO A) Below you will find selected information (in millions) .docx
1. (TCO A) Below you will find selected information (in millions) .docx1. (TCO A) Below you will find selected information (in millions) .docx
1. (TCO A) Below you will find selected information (in millions) .docxhyacinthshackley2629
 
Statement of Cash Flows - CR.pdf
Statement of Cash Flows - CR.pdfStatement of Cash Flows - CR.pdf
Statement of Cash Flows - CR.pdfNayyabMirTahir
 
Exercise 12-1Putnam Corporation had these transactions during 20.docx
Exercise 12-1Putnam Corporation had these transactions during 20.docxExercise 12-1Putnam Corporation had these transactions during 20.docx
Exercise 12-1Putnam Corporation had these transactions during 20.docxgitagrimston
 
Acct504 final exam 100% correct answers
Acct504 final exam 100% correct answersAcct504 final exam 100% correct answers
Acct504 final exam 100% correct answerskjgjkgjg87987
 
Ch02 P14 Build a Model Spring 1, 201372212Chapter 2. Ch 02 P14.docx
 Ch02 P14 Build a Model Spring 1, 201372212Chapter 2.  Ch 02 P14.docx Ch02 P14 Build a Model Spring 1, 201372212Chapter 2.  Ch 02 P14.docx
Ch02 P14 Build a Model Spring 1, 201372212Chapter 2. Ch 02 P14.docxarnit1
 
cash_flow_statement.pdf
cash_flow_statement.pdfcash_flow_statement.pdf
cash_flow_statement.pdfShreyGoel11
 
Statement of cash flows
Statement of cash flowsStatement of cash flows
Statement of cash flowsJashim Uddin
 
Startup Valuation - Hervé Lebret 2020
Startup Valuation - Hervé Lebret 2020Startup Valuation - Hervé Lebret 2020
Startup Valuation - Hervé Lebret 2020Hervé Lebret
 
Student ID 21458913 Exam 061684RR - The Impact of Manage.docx
Student ID 21458913 Exam 061684RR - The Impact of Manage.docxStudent ID 21458913 Exam 061684RR - The Impact of Manage.docx
Student ID 21458913 Exam 061684RR - The Impact of Manage.docxemelyvalg9
 
2 cash flow and financial statement analysis
2   cash flow and financial statement analysis2   cash flow and financial statement analysis
2 cash flow and financial statement analysisMalinga Perera
 
Exercise 8-4The ledger of Wainwright Company at the end of the c.docx
Exercise 8-4The ledger of Wainwright Company at the end of the c.docxExercise 8-4The ledger of Wainwright Company at the end of the c.docx
Exercise 8-4The ledger of Wainwright Company at the end of the c.docxgitagrimston
 
Exercise 1 Identify each of the following as (a) an underl.docx
Exercise 1 Identify each of the following as (a) an underl.docxExercise 1 Identify each of the following as (a) an underl.docx
Exercise 1 Identify each of the following as (a) an underl.docxrhetttrevannion
 
Please do not use the answer below; it has already been used. Please.docx
Please do not use the answer below; it has already been used. Please.docxPlease do not use the answer below; it has already been used. Please.docx
Please do not use the answer below; it has already been used. Please.docxjanekahananbw
 
Financial Management Unit 2 Power point.pptx
Financial Management Unit 2  Power point.pptxFinancial Management Unit 2  Power point.pptx
Financial Management Unit 2 Power point.pptxmishJOHN1
 
How to Prepare Budgets & Projections
How to Prepare Budgets &  ProjectionsHow to Prepare Budgets &  Projections
How to Prepare Budgets & ProjectionsTraklight.com
 
Acc mgt noreen13 how well am i doing statement of cash flows
Acc mgt noreen13 how well am i doing statement of cash flowsAcc mgt noreen13 how well am i doing statement of cash flows
Acc mgt noreen13 how well am i doing statement of cash flowsJudianto Nugroho
 

Similar to Chapter 5 - Cash flows - handout.pptx (20)

Cashflow questions
Cashflow questionsCashflow questions
Cashflow questions
 
Cash flow statement from ABTI presented by Md. Saiful Islam ACA
Cash flow statement from ABTI presented by Md. Saiful Islam ACACash flow statement from ABTI presented by Md. Saiful Islam ACA
Cash flow statement from ABTI presented by Md. Saiful Islam ACA
 
Statement of Cash Flows The Statement of Cash Flow, the fo.docx
Statement of Cash Flows The Statement of Cash Flow, the fo.docxStatement of Cash Flows The Statement of Cash Flow, the fo.docx
Statement of Cash Flows The Statement of Cash Flow, the fo.docx
 
1. (TCO A) Below you will find selected information (in millions) .docx
1. (TCO A) Below you will find selected information (in millions) .docx1. (TCO A) Below you will find selected information (in millions) .docx
1. (TCO A) Below you will find selected information (in millions) .docx
 
Statement of Cash Flows - CR.pdf
Statement of Cash Flows - CR.pdfStatement of Cash Flows - CR.pdf
Statement of Cash Flows - CR.pdf
 
Exercise 12-1Putnam Corporation had these transactions during 20.docx
Exercise 12-1Putnam Corporation had these transactions during 20.docxExercise 12-1Putnam Corporation had these transactions during 20.docx
Exercise 12-1Putnam Corporation had these transactions during 20.docx
 
Acct504 final exam 100% correct answers
Acct504 final exam 100% correct answersAcct504 final exam 100% correct answers
Acct504 final exam 100% correct answers
 
Ch02 P14 Build a Model Spring 1, 201372212Chapter 2. Ch 02 P14.docx
 Ch02 P14 Build a Model Spring 1, 201372212Chapter 2.  Ch 02 P14.docx Ch02 P14 Build a Model Spring 1, 201372212Chapter 2.  Ch 02 P14.docx
Ch02 P14 Build a Model Spring 1, 201372212Chapter 2. Ch 02 P14.docx
 
cash_flow_statement.pdf
cash_flow_statement.pdfcash_flow_statement.pdf
cash_flow_statement.pdf
 
2 funds flow_statement
2 funds flow_statement2 funds flow_statement
2 funds flow_statement
 
Statement of cash flows
Statement of cash flowsStatement of cash flows
Statement of cash flows
 
Startup Valuation - Hervé Lebret 2020
Startup Valuation - Hervé Lebret 2020Startup Valuation - Hervé Lebret 2020
Startup Valuation - Hervé Lebret 2020
 
Student ID 21458913 Exam 061684RR - The Impact of Manage.docx
Student ID 21458913 Exam 061684RR - The Impact of Manage.docxStudent ID 21458913 Exam 061684RR - The Impact of Manage.docx
Student ID 21458913 Exam 061684RR - The Impact of Manage.docx
 
2 cash flow and financial statement analysis
2   cash flow and financial statement analysis2   cash flow and financial statement analysis
2 cash flow and financial statement analysis
 
Exercise 8-4The ledger of Wainwright Company at the end of the c.docx
Exercise 8-4The ledger of Wainwright Company at the end of the c.docxExercise 8-4The ledger of Wainwright Company at the end of the c.docx
Exercise 8-4The ledger of Wainwright Company at the end of the c.docx
 
Exercise 1 Identify each of the following as (a) an underl.docx
Exercise 1 Identify each of the following as (a) an underl.docxExercise 1 Identify each of the following as (a) an underl.docx
Exercise 1 Identify each of the following as (a) an underl.docx
 
Please do not use the answer below; it has already been used. Please.docx
Please do not use the answer below; it has already been used. Please.docxPlease do not use the answer below; it has already been used. Please.docx
Please do not use the answer below; it has already been used. Please.docx
 
Financial Management Unit 2 Power point.pptx
Financial Management Unit 2  Power point.pptxFinancial Management Unit 2  Power point.pptx
Financial Management Unit 2 Power point.pptx
 
How to Prepare Budgets & Projections
How to Prepare Budgets &  ProjectionsHow to Prepare Budgets &  Projections
How to Prepare Budgets & Projections
 
Acc mgt noreen13 how well am i doing statement of cash flows
Acc mgt noreen13 how well am i doing statement of cash flowsAcc mgt noreen13 how well am i doing statement of cash flows
Acc mgt noreen13 how well am i doing statement of cash flows
 

Recently uploaded

2024-04-09 - Pension Playpen roundtable - slides.pptx
2024-04-09 - Pension Playpen roundtable - slides.pptx2024-04-09 - Pension Playpen roundtable - slides.pptx
2024-04-09 - Pension Playpen roundtable - slides.pptxHenry Tapper
 
Building pressure? Rising rents, and what to expect in the future
Building pressure? Rising rents, and what to expect in the futureBuilding pressure? Rising rents, and what to expect in the future
Building pressure? Rising rents, and what to expect in the futureResolutionFoundation
 
ekthesi-trapeza-tis-ellados-gia-2023.pdf
ekthesi-trapeza-tis-ellados-gia-2023.pdfekthesi-trapeza-tis-ellados-gia-2023.pdf
ekthesi-trapeza-tis-ellados-gia-2023.pdfSteliosTheodorou4
 
Aon-UK-DC-Pension-Tracker-Q1-2024. slideshare
Aon-UK-DC-Pension-Tracker-Q1-2024. slideshareAon-UK-DC-Pension-Tracker-Q1-2024. slideshare
Aon-UK-DC-Pension-Tracker-Q1-2024. slideshareHenry Tapper
 
Hello this ppt is about seminar final project
Hello this ppt is about seminar final projectHello this ppt is about seminar final project
Hello this ppt is about seminar final projectninnasirsi
 
TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...
TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...
TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...marcuskenyatta275
 
(Gender) tone at the top: the effect of board diversity on gender inequality
(Gender) tone at the top: the effect of board diversity on gender inequality(Gender) tone at the top: the effect of board diversity on gender inequality
(Gender) tone at the top: the effect of board diversity on gender inequalityGRAPE
 
2B Nation-State.pptx contemporary world nation
2B  Nation-State.pptx contemporary world nation2B  Nation-State.pptx contemporary world nation
2B Nation-State.pptx contemporary world nationko9240888
 
Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...
Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...
Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...marcuskenyatta275
 
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGecko
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGeckoRWA Report 2024: Rise of Real-World Assets in Crypto | CoinGecko
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGeckoCoinGecko
 
ders 3.3 Unit root testing section 3 .pptx
ders 3.3 Unit root testing section 3 .pptxders 3.3 Unit root testing section 3 .pptx
ders 3.3 Unit root testing section 3 .pptxErgin Akalpler
 
OAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptx
OAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptxOAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptx
OAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptxhiddenlevers
 
Seeman_Fiintouch_Newsletter_Apr-2024 (1).pdf
Seeman_Fiintouch_Newsletter_Apr-2024 (1).pdfSeeman_Fiintouch_Newsletter_Apr-2024 (1).pdf
Seeman_Fiintouch_Newsletter_Apr-2024 (1).pdfAshis Kumar Dey
 
Demographic transition and the rise of wealth inequality
Demographic transition and the rise of wealth inequalityDemographic transition and the rise of wealth inequality
Demographic transition and the rise of wealth inequalityGRAPE
 
Introduction to Health Economics Dr. R. Kurinji Malar.pptx
Introduction to Health Economics Dr. R. Kurinji Malar.pptxIntroduction to Health Economics Dr. R. Kurinji Malar.pptx
Introduction to Health Economics Dr. R. Kurinji Malar.pptxDrRkurinjiMalarkurin
 
What is sip and What are its Benefits in 2024
What is sip and What are its Benefits in 2024What is sip and What are its Benefits in 2024
What is sip and What are its Benefits in 2024prajwalgopocket
 
Money Forward Integrated Report “Forward Map” 2024
Money Forward Integrated Report “Forward Map” 2024Money Forward Integrated Report “Forward Map” 2024
Money Forward Integrated Report “Forward Map” 2024Money Forward
 
Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...
Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...
Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...Amil baba
 
Global Macroeconomics: Introducing GDP 2.0.pdf
Global Macroeconomics: Introducing GDP 2.0.pdfGlobal Macroeconomics: Introducing GDP 2.0.pdf
Global Macroeconomics: Introducing GDP 2.0.pdfnqsh
 
ΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτος
ΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτοςΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτος
ΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτοςNewsroom8
 

Recently uploaded (20)

2024-04-09 - Pension Playpen roundtable - slides.pptx
2024-04-09 - Pension Playpen roundtable - slides.pptx2024-04-09 - Pension Playpen roundtable - slides.pptx
2024-04-09 - Pension Playpen roundtable - slides.pptx
 
Building pressure? Rising rents, and what to expect in the future
Building pressure? Rising rents, and what to expect in the futureBuilding pressure? Rising rents, and what to expect in the future
Building pressure? Rising rents, and what to expect in the future
 
ekthesi-trapeza-tis-ellados-gia-2023.pdf
ekthesi-trapeza-tis-ellados-gia-2023.pdfekthesi-trapeza-tis-ellados-gia-2023.pdf
ekthesi-trapeza-tis-ellados-gia-2023.pdf
 
Aon-UK-DC-Pension-Tracker-Q1-2024. slideshare
Aon-UK-DC-Pension-Tracker-Q1-2024. slideshareAon-UK-DC-Pension-Tracker-Q1-2024. slideshare
Aon-UK-DC-Pension-Tracker-Q1-2024. slideshare
 
Hello this ppt is about seminar final project
Hello this ppt is about seminar final projectHello this ppt is about seminar final project
Hello this ppt is about seminar final project
 
TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...
TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...
TEST BANK For Auditing & Assurance Services A Systematic Approach, 11th Editi...
 
(Gender) tone at the top: the effect of board diversity on gender inequality
(Gender) tone at the top: the effect of board diversity on gender inequality(Gender) tone at the top: the effect of board diversity on gender inequality
(Gender) tone at the top: the effect of board diversity on gender inequality
 
2B Nation-State.pptx contemporary world nation
2B  Nation-State.pptx contemporary world nation2B  Nation-State.pptx contemporary world nation
2B Nation-State.pptx contemporary world nation
 
Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...
Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...
Test bank for corporate finance 13th stephen ross randolph westerfield jeffre...
 
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGecko
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGeckoRWA Report 2024: Rise of Real-World Assets in Crypto | CoinGecko
RWA Report 2024: Rise of Real-World Assets in Crypto | CoinGecko
 
ders 3.3 Unit root testing section 3 .pptx
ders 3.3 Unit root testing section 3 .pptxders 3.3 Unit root testing section 3 .pptx
ders 3.3 Unit root testing section 3 .pptx
 
OAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptx
OAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptxOAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptx
OAT_RI_Ep18 WeighingTheRisks_Mar24_GlobalCredit.pptx
 
Seeman_Fiintouch_Newsletter_Apr-2024 (1).pdf
Seeman_Fiintouch_Newsletter_Apr-2024 (1).pdfSeeman_Fiintouch_Newsletter_Apr-2024 (1).pdf
Seeman_Fiintouch_Newsletter_Apr-2024 (1).pdf
 
Demographic transition and the rise of wealth inequality
Demographic transition and the rise of wealth inequalityDemographic transition and the rise of wealth inequality
Demographic transition and the rise of wealth inequality
 
Introduction to Health Economics Dr. R. Kurinji Malar.pptx
Introduction to Health Economics Dr. R. Kurinji Malar.pptxIntroduction to Health Economics Dr. R. Kurinji Malar.pptx
Introduction to Health Economics Dr. R. Kurinji Malar.pptx
 
What is sip and What are its Benefits in 2024
What is sip and What are its Benefits in 2024What is sip and What are its Benefits in 2024
What is sip and What are its Benefits in 2024
 
Money Forward Integrated Report “Forward Map” 2024
Money Forward Integrated Report “Forward Map” 2024Money Forward Integrated Report “Forward Map” 2024
Money Forward Integrated Report “Forward Map” 2024
 
Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...
Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...
Uk-NO1 Rohani Amil In Islamabad Amil Baba in Rawalpindi Kala Jadu Amil In Raw...
 
Global Macroeconomics: Introducing GDP 2.0.pdf
Global Macroeconomics: Introducing GDP 2.0.pdfGlobal Macroeconomics: Introducing GDP 2.0.pdf
Global Macroeconomics: Introducing GDP 2.0.pdf
 
ΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτος
ΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτοςΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτος
ΤτΕ: Ανάπτυξη 2,3% και πληθωρισμός 2,8% φέτος
 

Chapter 5 - Cash flows - handout.pptx

  • 2. Contents  Compare cash flows from operating, investing, and financing.  Contrast cash flow statements prepared under IFRS and US GAAP.  Distinguish between the direct and indirect methods of presenting cash from operating activities.  Analyze and interpret both reported and common-size cash flow statements.  Calculate and interpret free cash flow to the firm, free cash flow to equity, and performance and coverage cash flow ratios.
  • 3. Statement Structure Cash flows from operations + Cash flows from investing activities + Cash flows from financing activities = Change in cash + Beginning cash balance = Ending cash balance Supplemental disclosure: non-cash financing and investing activities
  • 4. Operating Activities (USGAAP) Cash inflows from  Sale of goods or services  Returns on loans (interest)  Return on equity securities (dividends) Cash outflows for  Payments for acquisitions of inventory  Payments to employees  Payments for taxes  Payments for interest  Payments for other expenses The cash effects of transactions and other events that enter into the determination of net income:
  • 5. Investing Activities (USGAAP) Cash inflows from  Receipts for loans collected  Sales of debt or equity securities  Sales of plant, property, and equipment Cash outflows for  Loans to other entities  Investment in debt or equity securities  Purchase of plant, property, and equipment Lending money and collecting on those loans and acquiring and selling investments and productive long-term assets:
  • 6. Financing Activities (USGAAP) Cash inflows from  Sale of equity securities  Sale of bonds, mortgages, notes, and other short- and long- term borrowings Cash outflows for  Payment of dividends  Reacquisition of capital stock  Payment of amounts borrowed Borrowing and repaying long-term loans; issuing equity securities; payment of dividends to shareholders:
  • 7. Item Operating Investing Financing 1. Payment of federal income taxes. 2. Dividend payments to shareholders. 3. Repayment of long-term debt. 4. Loans made to another company. 5. Collection of accounts receivable. 6. Salaries paid to employees. 7.Payment of interest on bond debt. 8. Dividends received from investments. 9. Cash paid to acquire treasury stock. 10. Purchase of equipment for cash.
  • 9. Statement of Cash Flows – An Example B A T 90,000 $ 40,000 $ (24,000) $ 26,000 (48,000) (25,000) 13,000 (27,000) 15,000 $ 15,000 $ 15,000 $ Cash Flows of Competing Companies all numbers in thousands Cash provided (used) by operating activities Cash provided (used) by investing activities: Repayment of debt Net increase (decrease) in cash Proceeds from sale of operating assets Purchase of operating assets Cash provided (used) by financing activities: Proceeds from issuance of debt
  • 10.
  • 11. The Product life cycle & cash flows A series of phases all products go through The phases are often referred to as the:  introductory phase  growth phase  maturity phase  decline phase. The phase a company is in affects its cash flows.
  • 12. Introductory phase & cash flows To support asset purchases the company may issue stock or debt. Expect:  cash from operations to be negative  cash from investing to be negative.  cash from financing to be positive.
  • 13. Growth phase & cash flows The company is striving to expand its production and sales. Expect:  small amounts of cash to be generated from operations  cash from investing to be negative.  cash from financing to be positive.
  • 14. Maturity phase & cash flows Sales and production level-off Expect:  cash from operations to exceed investing needs.  cash from investing to be neutral.  cash from financing to be negative.
  • 15. Decline phase & cash flows Sales and production decline Expect:  cash from operations to decline.  cash from investing to possibly become positive.  cash from financing to possibly become negative.
  • 16. Impact of Product Life Cycle on Cash Flows
  • 17. A B C D Net cash from operating activities (60) 30 120 (10) Net cash from investing activities (100) 25 30 (40) Net cash from financing activities 70 (110) (50) 120 Net Income (40) 10 100 (5) Point in Time (in $ millions) Matching scenarios of cash flows with phases of the product life cycle.
  • 18. How to use cash flows information?
  • 19. Methods to prepare Statement of Cash Flows Direct Method vs. Indirect Method Different in calculating net cash flow from operating activities:  The DIRECT method deducts from operating cash receipts the operating cash disbursements.  The INDIRECT method adjusts net income for items that affected reported net income but did not affect cash.
  • 20. Jan. 31, 2020 Jan. 31, 2019 Jan. 31, 2018 Cash flows from operating activities: Cash received from customers $ 48,892,924 $ 47,836,136 $ 42,981,601 Cash paid to vendors and employees (48,118,538) (47,263,258) (41,668,923) Interest paid, net (87,886) (97,293) (86,544) Income taxes paid (93,410) (95,450) (131,632) Net cash provided by operating activities 593,090 380,135 1,094,502 Cash flows from investing activities: Proceeds from sale of business, net of cash divested 0 8,985 0 Acquisition of businesses, net of cash acquired (209,923) (124,223) (2,249,849) Expenditures for property and equipment (48,352) (40,995) (192,235) Software and software development costs (36,470) (20,419) (39,702) Other 4,491 4,943 2,567 Net cash used in investing activities (290,254) (171,709) (2,479,219) Cash flows from financing activities: Borrowings on long-term debt 300,000 0 1,008,148 Principal payments on long-term debt (345,177) (208,591) (861,394) Cash paid for debt issuance costs (4,341) 0 (6,348) Net repayments on revolving credit loans (9,005) (11,288) (16,028) Payments for employee withholdings on equity awards (9,428) (7,102) (6,027) Proceeds from the reissuance of treasury stock 1,660 1,771 1,543 Acquisition of noncontrolling interest (7,553) 0 0 Repurchases of common stock (170,191) (107,025) 0 Other 529 0 0 Net cash (used in) provided by financing activities (243,506) (332,235) 119,894 Effect of Exchange Rate on Cash and Cash Equivalents (17,087) (32,696) 94,860 Net increase (decrease) in cash and cash equivalents 42,243 (156,505) (1,169,963) Cash and cash equivalents at beginning of year 799,123 955,628 2,125,591 Cash and cash equivalents at end of year 841,366 799,123 955,628 Consolidated Statement Of Cash Flows - USD ($) $ in Thousands 12 Months Ended
  • 21.
  • 22. Net Income Cash Flows from Operating Activities Changes in current assets and current liabilities. + Noncash expenses such as depreciation and amortization. Indirect Method + Losses and - Gains
  • 23. Use this table when adjusting Net Income to Operating Cash Flows. Change in Balance During Year Increase Decrease Current Subtract from net Add to net income. Assets income. Current Add to net income. Subtract from net Liabilities income. Indirect Method
  • 24. Company B reported revenues of $60 million, total expenses of $35 million, and net income of $15 million in the most recent year. If accounts receivable were $32 million at the beginning of the year and $15 million at the end of the year, how much cash did the company receive from customers? A . $33 million. B . $60 million. C . $77 million.
  • 25. Company O reported cost of goods sold for the year of $150 million. Inventory declined from $40 million to $24 million. Accounts payable decreased from $35 million to $25 million. How much cash did the company pay to its suppliers during the year? A . $144 million. B . $156 million. C . $176 million.
  • 26. Cash Flows from Operating Activities (Indirect Method)  Noncash expenses  Nonoperating losses  Decreases in current assets  Increases in current liabilities  Nonoperating gains  Increases in current assets  Decreases in current liabilities Net Income Additions Deductions Net cash flow from operating activities
  • 27. Net income is £132,000, accounts payable increased £10,000 during the year, inventory decreased £6,000 during the year, and accounts receivable increased £12,000 during the year. Under the indirect method, what is net cash provided by operating activities? (a) £102,000. (b) £112,000. (c) £124,000. (d) £136,000.
  • 28. The following data are available for Allen Clapp Corporation. Net income Depreciation expense Dividends paid $2,000,000 400,000 600,000 Gain on disposal of land Decrease in accounts receivable Decrease in accounts payable 100,000 200,000 300,000 Net cash provided by operating activities is: (a) $1,600,000. (b) $2,200,000. (c) $2,400,000. (d) $2,800,000.
  • 29. The following data are available for Orange Peels Corporation. Sale of land Sale of equipment $100,000 50,000 Issuance of ordinary shares 70,000 Purchase of equipment 30,000 Payment of cash dividends 60,000 Net cash provided by investing activities is: (a) $120,000. (b) $130,000. (c) $150,000. (d) $190,000.
  • 30. The following data are available for Something Strange! Increase in accounts payable Increase in bonds payable Sale of investment Issuance of ordinary shares Payment of cash dividends € 40,000 100,000 50,000 60,000 30,000 Net cash provided by financing activities is: (a) €90,000. (b) €130,000. (c) €160,000. (d) €170,000.
  • 31.
  • 32.
  • 33.
  • 34.
  • 35.
  • 36.
  • 37. Evaluation of the sources and uses of cash Step 1 • What are major sources and uses of cash flow? (operating, investing, or financing activities?) • Is operating cash flow positive and sufficient to cover capital expenditures? Step 2 • What are major determinants of operating cash flow? • Is operating cash flow higher or lower than net income? Why? Step 3 • Where is the cash coming from to cover investments? • Why are assets being sold? What would be effects on the company? Step 4 • Is the company raising capital or repaying capital? Why? • What are the nature of its capital sources?
  • 38. 2020 2019 2018 Net Income (8,885) 1,686 1,412 Net cash provided by (used in) operating activities (6,543) 3,815 3,533 Net cash used in investing activities (4,342) (2,243) (1,973) Net cash provided by (used in) financing activities 10,994 (1,568) (1,672) Net increase (decrease) in cash 109 4 (112) Cash at beginning of the year 390 286 398 Cash at end of the year 499 290 286 American airlines group Consolidated Statement of cash flows
  • 39.
  • 40. 2021 2020 2019 Net Income (12,965) (11,178) 2,537 Net cash provided by (used in) operating activities (6,759) (6,455) 8,819 Net cash used in investing activities (1,945) 3,353 (1,284) Net cash provided by (used in) financing activities 8,766 1,798 (8,182) Net increase (decrease) in cash 62 (1,304) (647) Cash at beginning of the year 1,653 2,957 3,603 Cash at end of the year 1,715 1,653 2,956 Vietnamairlines Consolidated Statement of cash flows
  • 41.
  • 42.
  • 43. Common-size analysis of the statement of cash flows
  • 44. Common-size analysis of the statement of cash flows
  • 45. Common-size analysis of the statement of cash flows
  • 46. Free cash flow The excess of operating cash flow over capital expenditures is known generically as free cash flow.  Free cash flow to equity (FCFE) is the cash flow available to the company’s common stockholders after all operating expenses and borrowing costs (principal and interest) have been paid and necessary investments in working capital and fixed capital have been made.  Free cash flow to the firm (FCFF) is the cash flow available to the company’s suppliers of debt and equity capital after all operating expenses have been paid and necessary investments in working capital and fixed capital have been made.
  • 47.
  • 49. Free cash flow FCFF = CFO + Int(1 – Tax rate) - FCInv FCFE = CFO – FCInv +(-) Net borrowing (Net debt repayment) FCFF: Free cash flow to the firm FCFE: Free cash flow to equity CFO: Cash flow from operating activities Int: Interest expense FCInv: Fixed capital investment (capital expenditure)
  • 50.
  • 51.