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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

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Presentation Transcript
central fact
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
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
Fundamental Relations

Assets = Liabilities + Owners’ Equity

Cash = Liabilities + OE - Noncash Assets

Cash = Liab. + OE - Noncash Assets

Cash = NI + Liab. + CC - Div. - NCA

formats
Formats

Two formats for the operation section

Financing and investing are always the same

miscellaneous cash flow stuff
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
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
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
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
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)