1、2018/9/22,Cash Flow Analysis,1,Cash Flow Analysis,Session 6,2018/9/22,Cash Flow Analysis,2,This session,How to calculate and analysis a corporations Cash Flow analysisHow to evaluate the solvency of a company based on its balance sheet and cash flows,2018/9/22,Cash Flow Analysis,3,In case you missed
2、 the last session.,We covered .I&EBalance SheetsThe linkages between I&E and Balance Sheets,2018/9/22,Cash Flow Analysis,4,Business Challenges,Earn ProfitsConvert Profits to Cash as Fast as Possible,2018/9/22,Cash Flow Analysis,5,Cash Flow,From Operating ActivitiesFrom Investing ActivitiesFrom Finan
3、cing Activities,2018/9/22,Cash Flow Analysis,6,Balance SheetAssetsCash+Accounts Receivable+Inventory+Prepaid Expenses+Property, Plant & Equipment+Accumulated Depreciation= Total AssetsLiabilities & EquityAccounts Payable+ Accrued Operating Expenses+ Accrued Interest Payable+ Income Tax Payable+ Note
4、s Payable+ Capital stock+ Retained Earnings= Total Liability & Equity,Cash Flow StatementCash Flow From Operating ActivitiesNet Income- Accounts Receivable Increase- Inventory Increase- Prepaid Expenses Increase+ Depreciation Expense- Accounts Payable Increase- Accrued Expenses Increase- Income Tax
5、Payable= Cash Flow form Operating Activities+ Cash Flow From Investing ActivitiesPurchases of Property, Plant & Equipment+ Cash Flows From Financing ActivitiesShort-Term Debt Borrowing+ Long-Term Debt Borrowing+ Capital Stock Issue+ Dividends Paid to Stockholders= Increase in Cash for Year,Balance S
6、heet / Cash Flow Interactions,2018/9/22,Cash Flow Analysis,7,Cash Flow From Operations,BalanceSheetlastyear,BalanceSheetthisyear,Income & Expensethis year,Changes in the Balance sheet “closets plus the depreciation adjusted income,2018/9/22,Cash Flow Analysis,8,Cash Flow from Operations,Profit (“the
7、 bottom line” of the I&E Statement)Plus 7 year-to-year change adjustments (Balance Sheet)Accounts receivableInventoryPrepaid expensesDepreciationAccounts PayableAccrued ExpensesIncome Tax Payable,Cash flow, like theBalance Sheet usesCASH ACCOUNTINGNot ACCRUAL ACCOUNTING,2018/9/22,Cash Flow Analysis,
8、9,Operating Cash Flow Comments,Net Income is from the bottom line of I&E Statement (Depreciation Adjusted)Increases in Operating Assets decrease cash flow from profit (AR, Inventory, Prepaid Expenses) Increases in liabilities “help” cash flow (AP, Accrued Expenses, Income Tax Payable),2018/9/22,Cash
9、 Flow Analysis,10,Growth Consumes Ca$h!,Increasing revenue with controlled expenses will result in increased profitsRevenue increases also drive increases in operating assetsCash increases are not as large as profit increases but are delayed because of AR Declining businesses experience opposite eff
10、ect and can experience increased “cash flow” over profit changes,2018/9/22,Cash Flow Analysis,11,Depreciation & Operating Cash Flow,Depreciation: Since the company paid cash for the fixed assets when it bought them, the company does not consume cash a second time when it uses themThe depreciation of
11、 the I&E Statement is therefore “added back” for cash flow purposes,2018/9/22,Cash Flow Analysis,12,Balance SheetAssetsCash+Accounts Receivable+Inventory+Prepaid Expenses+Property, Plant & Equipment+Accumulated Depreciation= Total AssetsLiabilities & EquityAccounts Payable+ Accrued Operating Expense
12、s+ Accrued Interest Payable+ Income Tax Payable+ Notes Payable+ Capital stock+ Retained Earnings= Total Liability & Equity,Cash Flow StatementCash Flow From Operating ActivitiesNet Income- Accounts Receivable Increase- Inventory Increase- Prepaid Expenses Decrease+ Depreciation Expense- Accounts Pay
13、able Increase- Accrued Expenses Increase= Cash Flow form Operating ActivitiesCash Flow From Investing Activities- Purchases of Property, Plant & EquipmentCash Flows From Financing Activities+ Short-Term Debt Borrowing+ Long-Term Debt Borrowing+ Capital Stock Issue- Dividends Paid to Stockholders= In
14、crease in Cash for Year,Balance Sheet / Cash Flow Interactions,2018/9/22,Cash Flow Analysis,13,Purchases of Property, Plant & Equipment,Fixed Assets to modernize or expand capacity Will be capitalized (depreciated),2018/9/22,Cash Flow Analysis,14,The Depreciation Story,Capital assets are a cash flow
15、 out when the asset is bought (Cash Flow/Investing)The bought assets are added to the Property, Plant & Equipment line of the Balance SheetThe appropriate depreciation is allocated for in the period that it is “used” on the I&EThe sum of the accumulated depreciations from the I&E is subtracted from
16、the purchase price of the assets on the balance sheetThe allocated I&E depreciation is “added back” to the Income in the Cash Flow analysis,2018/9/22,Cash Flow Analysis,15,Balance SheetAssetsCash+Accounts Receivable+Inventory+Prepaid Expenses+Property, Plant & Equipment+Accumulated Depreciation= Tot
17、al AssetsLiabilities & EquityAccounts Payable+ Accrued Operating Expenses+ Accrued Interest Payable+ Income Tax Payable+ Notes Payable+ Capital stock+ Retained Earnings= Total Liability & Equity,Cash Flow StatementCash Flow From Operating ActivitiesNet Income- Accounts Receivable Increase- Inventory
18、 Increase- Prepaid Expenses Decrease+ Depreciation Expense- Accounts Payable Increase- Accrued Expenses Increase= Cash Flow form Operating ActivitiesCash Flow From Investing Activities- Purchases of Property, Plant & EquipmentCash Flows From Financing Activities+ Short-Term Debt Borrowing+ Long-Term
19、 Debt Borrowing+ Capital Stock Issue- Dividends Paid to Stockholders= Increase in Cash for Year,Balance Sheet / Cash Flow Interactions,2018/9/22,Cash Flow Analysis,16,Cash From Financing Activities,When operating cash flows are insufficient to fund company operations, the finance department must rai
20、se cash for the companyLoansLine of credit (short-term debt)Notes, Bonds or Debentures (long-term debt)Issue StockDividends paid to Stockholders are considered a financing cash flow,2018/9/22,Cash Flow Analysis,17,IBM 2001 Cash Flow (M$),Cash Flow From: 2001 2000 1999Operations 14,265 9,274 10,111In
21、vesting (6,106) (4,248) (1,669)Financing (5,309) (6,359) (8,625)Exchange rate changes (83) (1470) (149)Net Change in Cash 2,767 (1,480) (332)Cash on 1/1 3,563 5,043 5,375Cash on 12/31 6,330 3,563 5,043Days of cash 30 16 23,2018/9/22,Cash Flow Analysis,18,IBM 2001 Cash Flow from Operations (M$),2000
22、2001 Net Income 7,723 8,093Depreciation 4,195 4,513Amortization of Software 625 482Deferred income taxes 658 29Gains on asset sales (317) (792)Write-down on impaired investments 405 -Receivables 3,284 (4,720)Inventories 337 (55)Other assets (545) (643)Accounts payable (969) 2,245Other Liabilities (1
23、,131) 122Cash from Operations 14,265 9,274,2018/9/22,Cash Flow Analysis,19,IBM 2001Cash Flow from Investing (M$),2001 2000Plant, rental machines and other property (5,660) (5,616)Disposition of Plant, rental machines and other property 1,165 1,619Investments in software (655) (565)Purchases of marke
24、table securities and other investments (778) (750)Proceeds from marketable securities and other investments 738 1,393Acquisitions (916) (329)Net Cash used in Investing Activities (6,106) (4,248),2018/9/22,Cash Flow Analysis,20,IBM 2001Cash Flow from Financing (M$),2001 2000Proceeds from new debt 4,5
25、35 9,604Short-term borrowings 2,926 (1,400)Payments to settle debt (7,898) (7,561)Preferred stock transactions net (254) -Common stock transactions net (3,652) (6,073)Cash Dividends paid (966) (929)Net Cash Used in Financing (5,309) (6,359),2018/9/22,Cash Flow Analysis,21,Motorola 2000 Cash Flows,Ca
26、sh Flow From: 2000 1999 1998Operations (1,164) 2,140 1,295Investing (4,091) (960) (3,079)Financing 5,119 788 1,872Exchange rate changes (100) (33) 34Net Change in Cash (236) 1,935 122Cash on 1/1 3,537 1,602 1,480Cash on 12/31 3,301 3,537 1,602Days of Cash 33 40 18,2018/9/22,Cash Flow Analysis,22,Mot
27、orola 2000 Cash Flow from Operations (M$),Net Income 1,318 Depreciation 2,522 Charges for re-organization 1,483 Deferred income taxes 658 Acquired in-process R&D charges 332Sales of investments & businesses (1,570)Deferred income taxes 239Write-down on impaired investments 405 Receivables (1,471) In
28、ventories (2,305) Other assets (532) Accounts payable (666) Other Liabilities (514) Cash from Operations (1,164),2018/9/22,Cash Flow Analysis,23,Cooking!,Controlling discretionary expensesRepairs & maintenanceTraining & developmentTravelIncreasing revenue“Stuffing the channels”Lying,Fraud - go to ja
29、il,2018/9/22,Cash Flow Analysis,24,Enronitis,EnronDynergy Inc., Reliant Resources Inc., CMS EnergyTycoGEBoeingIBM,2018/9/22,Cash Flow Analysis,25,3 Key Financial Aspects of a Business,Cash FlowsMaintaining SolvencyProfitability,2018/9/22,Cash Flow Analysis,26,Solvency - Again,The Current Ratio: Test
30、 of Short-Term SolvencyCurrent Ratio = current assets / current liabilitiesGeneral Rule of thumb: Should be greater than 2 to get a short term loanThe Quick Ratio (The acid test ratio)Quick Ratio = (Cash + AR) / Current LiabilitiesShould be less than 1,2018/9/22,Cash Flow Analysis,27,Solvency -2,Deb
31、t to Equity RatioDebt to Equity = Total Liabilities / Total EquityMeasure of “leveraging” of debt. Usually kept below 1Times Interest Earned RatioTIER = Operating Earnings / Interest ExpenseHigher is better, must stay above 1,2018/9/22,Cash Flow Analysis,28,Profitability,Return on Sales RatioReturn
32、on Sales Ratio = Net Income / RevenueReturn on EquityROE = Income / Stockholders EquityShould beat other investment options considering risk Return on AssetsROA = Income / Total Assets Measured against companies borrowing interest rate,2018/9/22,Cash Flow Analysis,29,We just covered,How to calculate and a corporations Cash Flow analysisHow to evaluate the solvency of a company based on its balance sheet and cash flows,2018/9/22,Cash Flow Analysis,30,For Yourself,Read pages 68 - 158 of Tracys book,
