Transcript
Session #3Financial Accounting Pre‐Term
1
Cash Flow Statement
Important for determining how much cash a firm generates from running its daily operations, as well as how it finances long‐term operations
Because “cash is king” this entire statement is vital to understanding how good a business truly is.
2
3
Let’s Talk About Cash
Statement of Cash Flows reconciles all activities in the “Cash” account
2 Methods: Direct & IndirectDirect Method Not Widely UsedWe will focus on Indirect Method
3 Sections: Operating, Investing, & Financing
Not a good idea to think through operating cash flows. Just follow the rules!
4
Indirect Cash Flow Rules for Cash Flows from Operating Activities
An in CA leads to a in CFFO
A in CA leads to an in CFFO
A in CL leads to a in CFFO
An in CL leads to an in CFFO
5
Northwest Example
Relatively All‐Inclusive
We’re given everything we need as we have an Income Statement, Balance Sheet, and some additional notes
Let’s take a look!
6
7
Indirect Method
Only applies to Cash Flow from Operating Activities
Investing and Financing sections are always done the same way, no matter what method is used
8
Cash Flow from Operating Activities
Always start with Net IncomeThis is why we do Income Statement first!
Then adjust for non‐cash items
Then account for “working capital” on balance sheet
Current Assets and Current Liabilities9
10
Cash From Investing Activities
Focuses on Long‐Term Assets from Balance Sheet
Important for figuring out firm’s growth plans and investment decisions
11
12
Cash Flow from Financing Activities
Focuses on Long‐Term Liabilities and Shareholders’ Equity portions of Balance Sheet
Important for figuring out how firm externallyfinances its operations, if necessary
13
14
15
Cash Flow Statement
Information provided used as a starting point for fundamental business valuation
Lots of “great” companies went bankrupt and/or were frauds because they generated no cash
Enron, Worldcom, among many others
16
Free Cash Flow
The “end all, be all” number every owner is concerned with
Calculated as Cash Flow from Operating Activities minus Capital Expenditures
What are Capital Expenditures and why are they relevant?
17
Free Cash FlowNW had $116,600 in Cash Flow from Operating Activities
Capital Expenditures = $25,000 + $30,000 = $55,000
Used for land and equipment
Analysts want “gross,” not “net” figureExcludes sales of P,P,&E
18
Free Cash Flow$116,600 – 55,000 = $61,600
Think of this as discretionary cash to repay debt, retire stock, pay dividends
When you buy any business, this is what you really want to know!!!
19
Other Cash Flow AnalysisIs NW generating enough cash?
General Rule: Over time CFFO >= Net IncomeIf not, good chance management < ethical
One or two years does not make a trendOnly a warning to watch more carefully
Certain businesses have very volatile cash flows, making their importance minor at best!
20
21
What Cash Flow is Not
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization
Gives no estimate of discretionary cash flow
Other odd metrics that pop up from time to time that have never been used before
Or have been, but then left behind when sanity once again took over
22
Time Value of Money
How much do I need to save to retire with?
Is this an adequate investment?
What return do I need to reach my goals in 10, 20, 30 years?
MBAs spend an inordinate amount of time trying to learn this and are expected to know it
23
Future Value
How much is $10,000 worth in 20 years if I get an 8% rate of return?
$10,000(1.08)^20 = $46,610
$10,000 x 4.6610 = $46,610
24
Future Value
How much is $10,000 invested annually worth in 20 years if I get an 8% rate of return?
$10,000 x 45.762 = $457,620
Do this in Excel or get a calculator
25
Present Value
You want $10,000 in 10 years and assume you can get a 6% rate of return. How much do you need to invest today to reach your target?
$10,000 / (1.06)^10 = $5,584
$10,000 x 0.5584 = $5,584
26
Present Value
You have an asset that will give you $5,000 per year for 15 years, and you know you can get a 7% rate of return. How much should you pay for this asset?
This is the essence of discounted cash flows, albeit a simplified version.
27
Present Value
$5,000 x 9.1079 = $45,540
Notice you will receive $75,000 in total cash from this asset, but require a 7% rate of return.
Let’s see a real world example in Excel
28
top related