11 Making Informed Judgments Part 8 Cash Flow Measures Navigating Accounting, ® G. Peter & Carolyn R. Wilson, © NavAcc LLC. Modified by [Your Name].

22Menu  Operating cash flows Operating cash flows  Comparing income and operating cash flows Comparing income and operating cash flows  Closing thoughts Closing thoughts View in Slide Show Mode > click hyperlink.

33 Operating Cash Flows  Net cash flows from operating activities (NCFO) is an entity’s total cash inflows from its primary income-generating activities less its total cash outflows from these activities for a reporting period. Things You Need to Know Return to menu

44 Operating Cash Flows Answer the following questions from the perspective of a representative student in your group:  What would typically be included in your operating activities? Question Return to menu

55 Operating Cash Flows  Aside from cash inflows earned from part time work, students mostly have operating cash outflows related to the following costs:  Food & housing  Tuition  Entertainment  Telecommunications  Transportation Take Aways Return to menu

66 Comparing Income and Operating Cash Flows Answer the following questions from the perspective of a representative student in your group:  Measurement aside, compare your income and NCFO for the period that starts now and ends with the course?  What explains the difference between your income and NCFO?  How would the dispersion of experts’ estimates of your income differ from the dispersion of their estimates of your NCFO?  How would the difference between your income and NCFO for this period compare to the difference between your parents’ and grandparents’ incomes and NCFOs for the same period?  The expression "cash is king" is frequently heard on Wall Street by analysts and investors who believe NCFO measures performance better than income. Will your performance between now and the end of the course be reflected better by your income or your NCFO? Question Return to menu

77 Comparing Income and Operating Cash Flows  For most entities, NCFO for a period can be measured much more reliably than income, largely because cash can be measured more reliably than other assets and liabilities.  Putting aside the reliability of the measures, students typically generate considerably more income than NCFO during their college years, as they increase the future earnings power of their human capital.  The differences between students’ income and NCFO over a period will typically be much larger than the differences between their parents incomes and NCFOs over the same period. Take Aways Return to menu

88 Comparing Income and Operating Cash Flows  For students, “cash is a peasant” and “income is king”  To be sure students often have liquidity challenges, but typically these can be met by generating cash flows through part-time work or college loans.  Students’ primary task while in college is to develop their human capital and, measurement aside, changes in their human capital each year is by far the biggest contributor to their income.  When seeking additional financing (cash inflows) from parties who are investing in their educations, students often need to explain why their income (including the portion that can not be measured reliably) is so much greater than their cash from operations. Take Aways Return to menu

99 Closing Thoughts  A central theme for cash-flow statements is current- period income can differ significantly from current- period cash flows and both measures have important consequences for future cash flows.  The financial value of your human capital–your future earnings power–is by far your biggest asset even though banks and other lenders would not allow you to recognize it on your balance sheet because it can’t be measured reliably.  Likewise, they would not allow you to recognize the increases in the value of your human capital on your income statements; however, from an economic perspective it is probably by far the biggest source of income you earn while in college. Return to menu

10 Closing Thoughts  Thus, by performing well in school this term you can earn current income by increasing your future earnings power and thus future cash flows. However, you need current cash flows for tuition, books, etc. to generate current income and thus future cash flows.  Indeed, students often generate a great deal of income while in college, but continually run out of cash and confront liquidity crises.  Like you, most companies have significant differences between current-period income and current-period cash flows. For instance, Intel reported nearly $5.3 billion of net income during fiscal 2008, which was significantly less than the $11 billion of cash inflows from operating activities. Return to menu

11 Closing Thoughts  Net income is an important measure of Intel’s performance during 2008; however, an analysis of Intel’s cash flows can provide additional information needed for forecasting future performance.  Intel’s cash-flow statements, and those of other companies, help analysts gain insights into current and future performance. Cash flow analyses are increasingly important during tight credit markets, as they were during the financial crisis of 2007−2009. Return to menu