The Cash Flow Statement Crow River Investment Club June 10, 2003

2 References The Motley Fool Investment Workbook A Cash Flow Statement (Lowe’s)

3 Agenda Purpose Terms Analysis

4 Purpose Indicator of financial health of company Considered by some experts to be a better measure than earnings Shows the directional flow of money Where it comes from Where it goes

5 Basic Overview Net income Add Depreciation Subtract non-cash assets Add current liabilities that haven’t been paid Result -> an understanding of cash flow

6 Basic Terms Net income From the income statement Depreciation Loss of value of previous purchase Accounts receivable What is still owed to the company Remember -> an increase may mean the company isn’t effectively collecting for its product Inventory What the company still owns Increasing inventory means the company is producing faster than it’s selling Cash Provided by Operations Should be positive and rising If negative, indicates company cannot fund growth from internal means

7 Basic Analysis Free Cash Flow =(Cash Provided by Operations) – (Dividends Paid) – (PP&E) Measure the means a company has to increase shareholder value Stock re-purchase Debt reduction Acquisition

CF Example - LOW Cash Flows from Operating Activities: FY02FY01 Net Earnings$1471$1023 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: Depreciation and Amortization Deferred Income Taxes20842 Loss on Disposition/Writedown of Assets1839 Tax Effect of Stock Options Exercised2935 Changes in Operating Assets and Liabilities: Accounts Receivable – Net(6)(5) Merchandise Inventory(357)(326) Other Operating Assets(41)(37) Accounts Payable2281 Employee Retirement Plans40114 Other Operating Liabilities Net Cash Provided by Operating Activities

Additional Notes Cash Flows from Investing Activities Shows how company spends cash Cash Flows from Financing Activities Shows impact of debt reduction or issue Shows cost of dividend payments Cash and Cash Equivalents Reflects same line on balance sheet

10 Free Cash Flow =(Cash Provided by Operations) – (Dividends Paid) – (PP&E) =2696 – 66 – 2362 =$268 Million in FY02

Next Month: Bringing it all together - Lynn