Ch. 5 - Understanding Cash Flow Statements

Flashcards on Understanding Cash Flow Statements

Operating 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 principal, Issue or repurchase stock, Pay dividends

Indirect Method

Begins with net income and adjusts to operating cash flows. 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 Method

Shows each cash inflow and outflow related to receipts and disbursements. Provides information on the specific sources of operating cash receipts and payments. Does not net.

Non-cash Transaction

Any transaction that does not involve an inflow or outflow of cash (e.g., exchange of one non-monetary asset for another). Not incorporated in the cash flow statement. Must be disclosed.

Free 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.

Cash flow to revenue

CFO ÷ Net revenue, measures operating cash generated per dollar of revenue

Cash return on assets

CFO ÷ Average total assets, measures operating cash generated per dollar of asset investment

Cash return on equity

CFO ÷ Average shareholders’ equity, measures operating cash generated per dollar of owner investment

Cash to income

CFO ÷ Operating income, measures cash generating ability of operations

Cash flow per share

(CFO – Preferred dividends) ÷ Number of common shares outstanding, measures operating cash flow on a per -share basis

Debt coverage

CFO ÷ Total debt, measures financial risk and financial leverage

Interest coverage

(CFO + Interest paid + Taxes paid) ÷ Interest paid, measures ability to meet interest obligations

Reinvestment

CFO ÷ Cash paid for long-term assets, measures ability to acquire assets with operating cash flows

Debt payment

CFO ÷ Cash paid for long- term debt repayment, measures ability to pay debts with operating cash flows

Dividend payment

CFO ÷ Dividends paid, measures ability to pay dividends with operating cash flows

Investing and financing

CFO ÷ Cash outflows for investing and financing activities, measures ability to acquire assets, pay debts, and make distributions to owners