Tài chính doanh nghiệp - Chapter 6: Understanding cash flow statements

Chapter 6Understanding Cash Flow StatementsPresenter’s namePresenter’s titledd Month yyyyoverviewStatement of Cash Flows: OverviewFormat of Statement of Cash FlowsPreparing a Statement of Cash FlowsAdditional Analytical ConsiderationsCopyright © 2013 CFA Institute2Copyright © 2013 CFA Institute3Copyright © 2013 CFA Institute4APPLE, Inc.Classification of activities on the statement of cash flowsOperating activities: Deliver or produce goods for sale and provide services. Examples:Receive cash from customers Pay cash to suppliers Pay cash for operating expenses.Investing activities: Buy or sell long-term assets and other investments. Examples: Property, plant, and equipment (PP&E)Other companies’ securities (that are not cash equivalents)Financing activities: Obtain or repay capital. Examples:Borrow from creditors and repay the principalIssue or repurchase stockPay dividendsCopyright © 2013 CFA Institute5Colgate: cash flows classified by activity201120102009Net cash provided by operations2,896 3,211 3,277 Net cash used in investing activities (1,213) (658) (841)Net cash used in financing activities (1,242) (2,624) (2,270)Effect of exchange rate changes(53)(39) (121)Net (decrease) increase in cash and cash equivalents 388 (110)45 Cash and cash equivalents at beginning of year 490 600 555 Cash and cash equivalents at end of year $878 $490 $600 Copyright © 2013 CFA Institute6Colgate’s operating cash flows Copyright © 2013 CFA Institute7Colgate’s investing cash flows Copyright © 2013 CFA Institute8Colgate’s financing cash flows Copyright © 2013 CFA Institute9Common-size statement of cash flow for Colgate (abbreviated)201120102009    Operating ActivitiesNet income including noncontrolling interests15.3%14.9%15.6% Net cash provided by operations17.3%20.6%21.4% Net cash used in investing activities–7.2%–4.2%–5.5% Net cash used in financing activities–7.4%–16.9%–14.8%Copyright © 2013 CFA Institute10Each line item is presented as a percentage of net revenue.Colgate’s cash flows: summaryOverall, $323 million net increase in cash over three years, from $555 million at the beginning of 2009 to $878 million at the end of 2011. Colgate consistently obtains its cash inflow from operating activities and uses cash in investing and financing activities—a typical profile for a mature company.Colgate’s operating cash flow exceeded net income in every year—a desirable profile for a mature company.In every year, Colgate’s cash from operations was more than enough to cover its capital expenditures. The amount of dividends paid has steadily increased over the past three years.Amount of operating cash after paying for capital expenditures was more than enough to cover the dividend payments.In summary, Colgate’s cash flows represent a positive profile.Copyright © 2013 CFA Institute11Colgate’s operating cash flows:indirect methodCopyright © 2013 CFA Institute12Indirect vs. direct method for presenting operating cash flowsIndirect methodBegins with net income and adjusts to operating cash flows.Arguments for:Clearly shows the reasons for differences between net income and operating cash flows.Mirrors forecasting approach that begins with forecast of income, then derives cash flows.Direct methodShows each cash inflow and outflow related to receipts and disbursements.Arguments for:Provides information on the specific sources of operating cash receipts and payments. Does not net.Copyright © 2013 CFA Institute13Indirect vs. direct method for presenting operating cash flowsIndirect methodIFRS permit.U.S. GAAP permit.Used by the majority of companies, whether reporting under IFRS or U.S. GAAP.Direct methodIFRS encourage.U.S. GAAP encourage, but requires a reconciliation of net income to cash flow from operating activities.Copyright © 2013 CFA Institute14Tech data’s operating cash flows:example of direct methodCopyright © 2013 CFA Institute15Classification of cash flows under IFRS vs. U.S. GAAPCopyright © 2013 CFA Institute16ItemIFRSU.S. GAAPInterest receivedInterest paidDividends receivedDividends paidOperating or investingOperating or financingOperating or investingOperating or financingOperatingOperatingOperatingFinancingBank overdraftsConsidered part of cash equivalentsNot considered part of cash and cash equivalents; classified as financing.Taxes paidGenerally operating, but a portion can be allocated to investing or financingOperatingPortugal telecom’s operating cash flows: another example of direct methodCopyright © 2013 CFA Institute17Portugal telecom’s investing cash flows Copyright © 2013 CFA Institute18Portugal telecom’s financing cash flows Copyright © 2013 CFA Institute19noncash investing and financing activities Noncash transaction: Any transaction that does not involve an inflow or outflow of cash (e.g., exchange of one no-monetary asset for another).Not incorporated in the cash flow statement.Must be disclosed.Copyright © 2013 CFA Institute20Copyright © 2013 CFA Institute21Cash at beginning and end of year links to the balance sheet.Copyright © 2013 CFA Institute22Cash at beginning and end of year links to the balance sheet.Preparation of the Statement of Cash Flows: StepsStep 1. Determine the change in cash.Step 2. Determine the net cash flow from operating activities. Use both the current year's income statement and information on current assets and liabilities from the comparative balance sheets.Step 3. Determine net cash flows from investing and financing activities. Examine all other changes in the balance sheet accounts.Step 4. Include summary of net increase (decrease) in cash, cash at beginning, and cash at end.Step 5. Disclose any significant noncash transactions separately at the bottom of the statement.Copyright © 2013 CFA Institute23ExampleA new company has the following transactions: Sells stock for $100.Buys a building for $50. Its primary line of business is selling a service, so it has no COGS (cost of goods sold) and no inventory. Makes credit sales of $100, and subsequently collects $90. Accrues SG&A (selling, general, and administrative) expense of $40, and subsequently pays cash of $25. Records depreciation expense of $10. 24Copyright © 2013 CFA InstituteStep 1. Determine the change in cashBeginning balanceEnding balanceChangeCash0115 115 Accounts receivable010 10 Building050 50 Accumulated depreciation0(10)(10)Total assets0165165 Accounts payable015 15 Common stock0100 100 Retained earnings050 50 Total liabilities and equity0165 165 This step is straightforward. The information is on the comparative balance sheets. Change was $115.Copyright © 2013 CFA Institute25Step 2. Determine the net cash flow from operating activities, beginning with Net Income for the indirect methodIncome statementCredit sales$ 100SG&A expense–40Depreciation expense–10Net income$ 50Net income$ 50+ Depreciation expense+10Noncash expense– Change in receivables–10Only collected $90 + Change in payables+15Only paid $25Cash from operating activities$ 65Copyright © 2013 CFA Institute26Step 3. Determine net cash flows from investing and financing activitiesBeginning balanceEnding balanceChangeCash0115 115 In first stepAccounts receivable010 10 In operatingBuilding050 50 ?Accumulated depreciation0(10)(10)In operatingTotal assets0165165 Accounts payable015 15 In operatingCommon stock0100 100 ?Retained earnings050 50 In operating*Total liabilities0165 165 Examine all other changes in the balance sheet accounts.*There are no dividends in this example; all changes in retained earnings are from net incomeCopyright © 2013 CFA Institute27Investing cash flowsDetermine investing cash flows by examining changes in long-term assets. In this example, we have only PP&E.Beginning PP&E + Purchases – Dispositions = Ending PP&EEnding PP&E – Beginning PP&E = Purchases – Dispositions (i.e., investing cash flows)PP&E increased by $50, indicating cash spent acquiring PP&E.We also know this from the transaction list at the beginning of the example.Copyright © 2013 CFA Institute28Financing cash flowsDetermine financing cash flows by examining changes in debt and equity accounts. In this example, we have only common stock.Beginning stock + Issuances – Repurchases = Ending stockEnding stock – Beginning stock = Issuances – Repurchases Stock account increased by $100, indicating cash was raised by issuing stock.We also know this from the transaction list at the beginning of the example.Copyright © 2013 CFA Institute29Step 3. Determine net cash flows from investing and financing activitiesBeginning balanceEnding balanceChangeCash0115 115 In first stepAccounts receivable010 10 In operatingBuilding050 50 In investingAccumulated depreciation0(10)(10)In operatingTotal assets0165165 Accounts payable015 15 In operatingCommon stock0100 100 In financingRetained earnings050 50 In operating*Total liabilities0165 165 Examine all other changes in the balance sheet accounts.*There are no dividends in this example, so all change was net income.Copyright © 2013 CFA Institute30Company ABCCash Flow Statement for the period ended Operating cash flow Net income50Depreciation expense+ 10Increase in accounts receivable– 10Increase in accrued liabilities+ 15Total operating cash flow+ 65  Investing cash flow Capital expenditure– 50  Financing cash flow Issue of stock+ 100  Total change in cash+ 115Beginning cash balance0Ending cash balance115Indirect methodCopyright © 2013 CFA Institute31Alternative Step 2. Determine the net cash flow from operating activities, beginning with each line item for the direct methodIncome statementCredit sales$ 100SG&A expense–40Depreciation expense–10Net income$ 50Cash from customers$ 90Credit sales ($100) minus Change in receivables ($10)Cash paid for expenses–25SG&A expenses ($40) minus increase in payables ($15)Cash from operating activities$ 65Copyright © 2013 CFA Institute32Company ABCCash Flow Statement for the period ended Cash collected from customers+ 90Cash paid to suppliers– 25Total operating cash flow+ 65  Investing cash flow Capital expenditure– 50  Financing cash flow Issue of stock+ 100  Total change in cash+ 115Beginning cash balance0Ending cash balance115direct methodCopyright © 2013 CFA Institute33Free Cash FlowFree Cash Flow to the Firm (FCFF): Cash flow available to the company’s suppliers of capital (debt and equity).After all operating expenses (including taxes) have been paid.After all operating investments have been made for fixed capital and working capital. Free Cash Flow to Equity (FCFE): Cash flow available to the company’s common stockholders. After all operating expenses (including taxes) have been paid.After borrowing costs (principal and interest) have been paid.After all operating investments have been made for fixed capital and working capital. Copyright © 2013 CFA Institute34Compute FCFF Net Income+ Noncash charges– Working capital investment+ Interest expense × (1 – Tax rate)– Fixed capital investments= FCFFInterest, a cash flow available to one of the capital providers, which has been deducted from net income, so it must be added back35Copyright © 2013 CFA InstituteFCFF can also be computed from cash flow from operating activities Net income+ Noncash charges– Working capital investment= Cash from operating activities+ Interest Expense × (1 – Tax rate)– Fixed capital investments= FCFFCFO already has added noncash items to net income and deducted working capital investmentCopyright © 2013 CFA Institute36Compute FCFE Net Income+ Noncash charges– Working capital investment– Fixed capital investment+ Net new borrowing (or minus net debt repayments)= FCFECopyright © 2013 CFA Institute37Positive FCFE means that the company has an excess of operating cash flow over amounts needed for capital expenditures and repayment of debt.Cash flow performance ratiosRatioCalculationWhat It MeasuresCash flow to revenueCFO ÷ Net revenueOperating cash generated per dollar of revenueCash return on assetsCFO ÷ Average total assetsOperating cash generated per dollar of asset investmentCash return on equityCFO ÷ Average shareholders’ equityOperating cash generated per dollar of owner investmentCash to incomeCFO ÷ Operating incomeCash generating ability of operations Cash flow per share(CFO – Preferred dividends) ÷ Number of common shares outstanding Operating cash flow on a per-share basisCopyright © 2013 CFA Institute38Cash flow coverage ratiosRatioCalculationWhat It MeasuresDebt coverageCFO ÷ Total debtFinancial risk and financial leverageInterest coverage(CFO + Interest paid + Taxes paid) ÷ Interest paidAbility to meet interest obligationsReinvestmentCFO ÷ Cash paid for long-term assets Ability to acquire assets with operating cash flowsDebt paymentCFO ÷ Cash paid for long-term debt repaymentAbility to pay debts with operating cash flowsDividend paymentCFO ÷ Dividends paidAbility to pay dividends with operating cash flowsInvesting and financingCFO ÷ Cash outflows for investing and financing activitiesAbility to acquire assets, pay debts, and make distributions to ownersCopyright © 2013 CFA Institute39Summary The cash flow statement provides information about a company’s cash receipts and cash payments during an accounting period. Cash flows are categorized as operating, investing, and financing.Compared with U.S. GAAP, IFRS provide companies with more choices in classifying some cash flow items as operating, investing, or financing activities.The operating activities section of the statement of cash flows can be presented using the direct method or the indirect method.Two approaches to developing common-size cash flow statements are the total cash inflows/total cash outflows method and the percentage of net revenues method.Cash flow ratios measure a company’s profitability, performance, and financial strength.Copyright © 2013 CFA Institute40