Educational Component Cash Flow Statement April 5th, 2015

Recap Financial Statements Balance Sheet Cash Flow Statement Income Statement Balance Sheet: A snapshot in time. Income Statement: The operations of company over the period of time. Accrual basis (even if the company has not received the payment for the product yet, it is already accounted in income) Cash Flow Statement: demonstrates cash levels of the company. For ex., the company can be very profitable (high net income) but have no cash on hand and become insolvent (unable to pay short term liabikities) Demonstrates the quality of company’s income

Cash Flow Statement Answers 3 questions: Where did the cash come from? What was the cash used for? What was the change in the cash balance? Used to access company’s liquidity, operating capabilities and risk Demonstrates the quality of company’s income Company might have high net income on IS but have no cash to meet its short term liabilities If the company generates enough cash from operation to sustain the business If the company generates enough cash to pay off existing debts as they mature If the company has enough cash to take advantage of new investment opportunities

Where does cash come from? Olena’s T-Shirt store Selling T-Shirts Issuing bonds and stocks Sale of assets (equipment) Interest, income and dividends Accounts receivables

What is cash used for? Olena’s T-Shirt store Production of T-Shirts Dividend payment Repurchase the stock Acquire property, plant, equipment Purchase of businesses Repay debt

Example: Tesla Motors, Inc. http://ir.teslamotors.com/secfiling.cfm?filingID=1564590- 16-13195&CIK=1318605#TSLA- 10K_20151231_HTM_ITEM_8

1. Operating activities 2. Investing activities Components of CFS Cash from regular business operations Drives income 1. Operating activities Purchase/sale of assets Acquisitions “CAPEX” 2. Investing activities Pay dividends Pay off the debt Retire stocks Issue bonds, stocks 3. Financing activities CF from operating activities: How much money does the company bring in from ongoing regular business operations (manufacturing of a product) Investors are searching for positive cash flow BUT if the company sells all of its assets and get the positive cash flow = bad

Connecting financial statements Related to balance sheet and income statement : Balance sheet: net cash flow should equal the difference between 2 consecutive balance sheets Income statement: cash flow from operating activities starts with net income from the income statement Go/sic  Documents to find Excel with an example of simplified cash flow

Summary Cash flow demonstrates company’s : operating, financing, investing transactions ability to generate future cash flow ability to meet its obligations and pay dividends need for external financing !!Careful!! companies may make cash flow look more attractive for better credit rating Compare the operating cash flow with the net income. If Net income is substantially higher than cash flows => the company might be accounting for too many accruals (Net income)