View
215
Download
0
Embed Size (px)
Citation preview
Statement of Cash Flows
CENTRAL FACT
Over long enough periods:
NI = Cash from Ops. + Cash from Inv.
= Free Cash Flows
• The difference is timing
• The goal of SCF is to explain the difference
Why do we care about cash?
• Information on:– Liquidity– “Quality” of earnings– “Free cash flows” for valuation
• Problem:– interpretation is difficult and context specific– depends on the life-cycle of the company– it is hard to know what is a good cash flow
Fundamental Relations
Assets = Liabilities + Owners’ Equity
Cash = Liabilities + OE - Noncash Assets
Cash = Liab. + OE - Noncash Assets
Cash = NI + Liab. + CC - Div. - NCA
Formats
• Two formats for the operation section
• Financing and investing are always the same
Miscellaneous Cash Flow Stuff
• Why don’t lines on SCF tie to changes on B/S?
• Foreign currency translation– subsidiaries are generally accounted for in local currency
– in consolidation local currency is converted to dollars
– changes in accounting balances that result from changes in currency are handled as a separate line item on SCF
– changes in shareholders’ equity go to “other equity” on the balance sheet
Example
• Foreign sub with the following ‘96 and ‘97 ¥ B/S and the ¥ weakening from ¥100/$ to ¥111/$.
‘96 & ‘97 ‘96 ‘97
Cash ¥100 $1.0 $0.9
Inventory ¥200 $2.0 $1.8
Equity (100% owned) ¥300 $3.0 $2.7• B/S--change in equity ($0.3) is “foreign currency translation
adjustment” in shareholders’ equity• SCF--the change in cash ($0.1) is separate line item (not spread
across change in inventory, etc)
Acquisition Accounting
• You buy a company with identifiable assets with a book value of $100 (fair value of $200) for $250.
Identifiable Assets $200
Goodwill $50
Cash $250
Goodwill will appear as an intangible asset
On the SCF, the only effect will be $250 as an investing use of cash, even though lots of other accounts change
Major Noncash Transactions
• Transactions not involving cash are not reported on the face of the statement– e.g., purchase PP&E for debt, acquire other
companies for stock, swap assets
• Disclosure is required– typically at the bottom of the SCF
Other Items
• Firms must disclose interest and taxes paid– income statement gives “accrual” amounts– cash interest & taxes are used in some analysis– generally disclosed at the bottom of SCF– sometimes disclosed in notes (e.g., Coke)