Module 6 Statement of Cash Flows

Motorola and Blockbuster Motorola (in millions) Net earnings (loss) $1,318891(907) Net cash flow from ops (1,164)2,1401,295 Blockbuster (in millions) Net loss (75.9)(69.2)(336.6) Net cash flow from ops 1,320.81,142.81,234.5

History Statement of Sources and Uses of Funds Funds Statement Statement of Changes in Financial Position SFAS 95 – Statement of Cash Flows effective for annual financial statements for FY ending after 7/15/88

Overview of SCF One of the major financial statements Purpose is to provide information about cash inflows and outflows Explains the changes in cash What is cash and cash equivalents?? –Cash –Short term investments in T-bills, commercial paper and money market funds

Three classifications of cash flow activity OperatingInvestingFinancing

Operating Activities Cash inflows from: –Sales of goods or services –Interest –Dividends –Sale of trading securities Cash outflows from: –Merchandise inventory –Salaries –Interest expense –Purchase of trading securities

Investing Activities Cash inflows from: –Sales of property, plant and equip –Sale of available for sale and held-to-maturity securities –Collection of money loaned to others Cash outflows for: –Purchase of property, plant and equipment –Purchase of securities above –Making loans to others

Financing Activities Cash inflows from: –Capital stock –Debt (loans, bonds, notes) Cash outflows for: –Buying back corporate stock (Treasury stock) –Paying the principal portion of debt –Paying cash dividends to shareholders

Tips for categorizing Look at company’s perspective, not the type of account involved. Example – dividends Example – loans Example – common stock

Users of SCF Info ManagementStockholdersCreditors FASB prohibits companies from disclosing cash flow per share

Presentation Method Direct v. indirect Difference lies in operating section Direct method –Recommended by FASB –Shows classes of gross receipts and disbursements Indirect method –Starts with net income (accrual basis) and adjusts to a cash basis income –Used by more companies

Operating Income v. Cash Flows Company1995 (in 000’s) (in 000’s)1996 (in 000’s) 1997 Alaska Airlines Inc fm Ops CF - Op 24,800104,40045,600203,00076,000323,200 Boeing Inc fm Ops CF - Op -36,0002,135,0001,818,0003,611, ,100,000 Office Max Inc fm Ops CF - Op 125,763-38,72268,805-24,31389,620-90,031

How do I use the information? Adjusted Cash Flow to Income Ratio Disclosure – operating income Cash inflows primarily coming from asset sales, borrowing or equity offerings Computer adjusted cash flow and income from continuing operations Cash flow ambiguities Cash flow ambiguities Motley Fool’s view Motley Fool’s view

Enron (in millions) Net income $ Net cash provided by operating activities 4,7791,2281,640

Caution Flags Failure to generate cash from operating activities Large fluctuations in cash flow from operating activities over time Net income and cash flow from operations not tracking closely Net income and cash flow from operations moving in different directions Positive cash flow from investing activities because company is selling off assets to generate cash

Caution Flags Positive cash flow from financing activities for several periods –0 possibly indicating borrowing needed to offset lack of internet cash generation Company highlights cash flow in shareholders’ letter, especially in same paragraph discussing falling stock price Adjustments to net income from changes in receivables, inventories, and payables not in line with sales Management’s explanation of adjustments to net income obtuse or missing