Financial Statement Analysis I: Chapter 4 ©NACM

General Chapter Notes A. The Statement of Cash Flows as a Derivative Statement B. FASB 95 Analysis: Cash flows from Operations, Investing, and Financing Slide 4-1

Cash Flows of the Firm Slide 4-2

General Chapter Notes (cont.) Slide 4-3 C. How to Calculate Cash Flows 1. Net Income 2. Assets a. Increases are uses of cash (negative cash flows) b. Decreases are sources of cash (positive cash flows) 3. Liabilities and Equity a. Increases are sources of cash (positive cash flows) b. Decreases are uses of cash (negative cash flows) 4. Classifying cash flows as Operating, Investing or Financing

General Chapter Notes (cont.) D. The ABC Corp. Example Problem (balance sheets and income statement are provided as links to this module) Cash Flow Statement - Indirect Method Cash Flows from Operations Net Income $2,500 Depreciation (Change in Accum. Depr.) $1,500 Accounts Receivable ($1,500) Inventory $1,000 Accounts Payable $ CF from Operations $4,000 Slide 4-4

General Chapter Notes (cont.) D. The ABC Corp. Example Cash Flows from Investing Additions to Prop., Plant, and Eq. ($4,000) Cash Flows from Investing ($4,000) Cash Flows from Financing Current LTD ($500) LTD $700 Dividends Paid ($1,000) Cash Flows from Financing ($800) Total Cash Flow - All Activities ($800) Beginning Cash and Mar. Sec. $2, Ending Cash and Mar. Sec. $1,200 Slide 4-5

General Chapter Notes (cont.) E. Analysis of Cash Flow Statement for ABC – What went on during the year CF from Operations $4,000 CF from Investing ($4,000) CF from Financing ($800) Net Cash Flow ($800) F. Liquidity and Cash Flow Analysis 1. Cash flow problems in the working capital cycle 2. Cash balance 3. Using cash flow analysis in trade credit decisions Slide 4-6

Notes for Particular Parts of Chapter 4 A. Accrual Accounting for Income versus Cash Flow B. Cash Flows as a Result of the Firm’s Decisions and their Outcomes C. How Interest on Debt is Treated in FASB 95 D. Income Statement Depreciation, Changes in Accumulated Depreciation, and CF from Operations E. Direct and Indirect Methods of Calculating Cash Flows F. Composite Transactions Slide 4-7

Notes for Particular Parts of Chapter 4 (cont.) G.Cash Flow and Trade Credit Granting Decisions H. Profitable but Out of Cash: Nocash Corp. 1. Credit management and inventory management 2. Effects of rapid growth on financing needs I. Analysis of Cash Flows for Sage Corp. J. Summary Analysis of Cash Flows K. Statement Quality and Cash Flow L. Limitations of Cash Flow Analysis Slide 4-8

Dragoon Enterprises Cash Flows From Operations net income $ 1,050 increase in accum. depreciation $ 100 increase in accounts receivable $ (550) decrease in inventory $ 110 increase in accounts payable $ 300 decrease in acc. wages payable $ (100) decrease in interest payable $ (50) increase in taxes payable $ Total Cash Flow From Operations $ 1,010 Slide 4-9

Dragoon Enterprises Cash Flows from Investing increase in gross PP&E $ (700)Total Cash Flow From Operations $ 1,010 decrease in long term investments $ 140Total Cash Flow from Investing $ (560) Total Cash Flow from Financing $ (100) Total Cash Flow from Investing $ (560)Total Cash Flow (change in cash) $ 350 Cash Flows from FinancingBeginning Cash $ 850 decrease in bonds payable $ (300)Total Cash Flow $ 350 increase in capital stock $ 70Ending Cash $ 1,200 increase in paid in capital $ 330 dividends paid $ (200) Total Cash Flow from Financing $ (100) Slide 4-10

Gerber Scientific Summary Analysis Statement of Cash Flows Year2010%2009%2008% Inflows Cash Flow from Operations$25, %$9,7747.8%$10,2053.0% Sale of Investments$4640.4%$7050.6%$7510.2% Sale of Net Assets$13, %$2,6222.1%$3450.1% Debt Proceeds$89, %$110, %$321, % Common Stock Activities$8980.7%$1,3730.4% Effect of Exchange Rates$3330.3%$1,4130.4% Total$129, %$124, %$335, % Slide 4-11

Gerber Scientific Summary Analysis Statement of Cash Flows Year2010%2009%2008% Outflows Capital Expenditures$4,4893.5%$8,1876.4%$8,5892.6% Purchases of Investments$3080.2%$4570.4%$7530.2% Business Acquisitions$3,4732.7%$34, %$4,6501.4% Inv. in Intangible Assets$1,3681.1%$8280.6%$8680.3% Debt Repayments$117, %$80, %$314, % Debt Issuance Costs$4940.4%$1,1740.9%$9930.3% Common Stock Activities$4860.4% Other Financing Activities$3410.3% Effect of Exchange Rates$3,0742.4% Total$128, %$128, %$330, % Slide 4-12