1. Statement of Cash Flows MIM 517 Fall 2010 Class 5

2. Statement of Cash Flows (SCF) What financial statements do we have to evaluate a firm? Income Statement Balance Sheet Statement of Cash Flows

3. Why do we care about cash flow? 1) Somewhat less subject to “management” 2) Ability to generate future cash flows 3) Ability to pay dividends and meet obligations 4) Differences between N/I and cash flows 5) Decide if the company is using cash wisely? How were proceeds of debt or stock used? How were expansions financed? How was the retirement of debt accomplished? How much money was borrowed?

4. What does the SCF do? Cash by functional category Why NI ≠ cash flows from op’s Tells us about the quality of earnings Constructed primarily from B/S and I/S

5. How the SCF Works Direct vs. Indirect Method Common activities in each category Operating Investing Financing Categories sum to net change in cash for period

6. Indirect Method:Operating Section Reconcile N/I to net change in Cash Add back non-cash expenses Adjust for changes in operating assets and liabilities Ex: Overall A/P increased for the year. Thus, add back increase in A/P to N/I. Ex: Overall A/R increased for the year. Thus subtract out the increase in A/R from N/I

7. Indirect Method: Operating Section Effect of change in crt assets & liabilities on SCF Current Assets: Increase -> Use of cash -> subtract Decrease -> Source of cash -> add Current Liabilities: Increase -> Source of cash -> add Decrease -> Use of cash -> subtract Caution: Change in B/S may not articulate Translation Acquisitions

8. Analyzing the SCF Overall Consider where company is in its lifecycle Summary analysis by Inflows and Outflows Overall comparison of inflows and outflows w/in and across years Section by section: Where is cash coming from and where is it going? Line by line explanation, focus on large items

9. Analyzing the SCF Overall: Summary of Inflows & Outflows (Fig. 4.6) 2009%2008%2007% Inflows: Operations Sale of Mkt Sec Sales of LT assets Sales of C/S Add’s to Debt Total Outflows: Operation Purchase of PPE Purchase of Mkt Sec Repmts of Debt Dividends Pd Total

10. Analyzing the SCF Overall: Summary of Inflows & Outflows Do summary analysis of inflows and outflows for Starbucks. (Refer to the work you did on 4.12 as background.)

11. Analyzing the Operating Section Goal is to assess quality of earnings Look at adjustments Non-cash charges Are increases to cash sustainable? Look at working capital items. Look at changes in context of revenue trends and company lifecycle Bottom line: The higher the correlation of N/I with cash provided by ops, the higher the quality of earnings tends to be.

12. Where to look for problems Operating Section N/I not tracking w/ cash from operations Increases in provision for uncollectibles Inventories growing faster than sales Current liabilities increasing Debt costs (interest expense in this section!) Note: Cash flow must be looked at in light of the developmental stage of the company

13. Where to look for problems cont. Investing Section Cash from investments in the market? Cash from disposal of fixed assets? Adequate capital investments? Financing Section Level of stock issuance? Level of debt?

14. Another Analysis Tool Free Cash Flow Aims to assess cash needs for current operations AND expansion with new capital investment. Many possible measures Ex: Cash flows from op’s – capital expenditure – dividends Take great care in using this!

15. Other companies… Lets look at your companies