Cash-Flow Statement Exercise – Practical Case Accounting (SMBA)

Profit and Loss Statement – FY 2016

• Sales (Revenue)
  • $17{,}560$
  • Represents 100 % of the company’s top-line income generated by distributing electronic components for gym-training machines.
• Cost of Goods Sold (COGS)
  • $2{,}458$
  • Direct purchasing cost of the components.
• Gross Margin
  • $15{,}102 = 17{,}560 - 2{,}458$
  • Measures the markup that remains to cover operating costs.
• Salaries & Overheads
  • $5{,}187$
  • Fixed & variable personnel costs plus administrative overhead.
• EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation)
  • $9{,}915 = 15{,}102 - 5{,}187$
  • A cash-proxy for operations before non-cash charges.
• Depreciation
  • $1{,}711$ (non-cash)
  • Matches the identical figure shown on the asset side as accumulated depreciation.
• EBIT (Operating profit)
  • $8{,}204 = 9{,}915 - 1{,}711$
• Financial Expenses (Interest)
  • $1{,}845$ → reduces profit available to the owners.
• EBT (Earnings Before Tax)
  • $6{,}359 = 8{,}204 - 1{,}845$
• Taxes
  • $2{,}543$
  • Effective tax rate $\frac{2{,}543}{6{,}359}\approx40\%$ (rounded).
• Net Income (NI)
  • $3{,}816 = 6{,}359 - 2{,}543$
  • Flows to retained earnings or dividends in the equity section.

Balance Sheet – 2015 vs 2016

Assets

• Cash & Banks ↑ $+1{,}567$ ( $4{,}122 - 2{,}555$ )
• Inventory ↑ $+172$ ( $2{,}337 - 2{,}165$ )
• Accounts Receivable ↑ $+255$ ( $3{,}023 - 2{,}768$ )
• Current Assets ↑ $+1{,}994$ overall (driven mainly by cash growth).
• Gross Fixed Assets ↑ $+873$ ⇒ evidence of capital expenditure (CAPEX).
• Accumulated Depreciation ↑ $+1{,}711$ (identical to P&L depreciation).
• Net Fixed Assets ↓ $-838$ (net of CAPEX and depreciation).
• Total Assets ↑ $+1{,}156$ ( $31{,}126 - 29{,}970$ ).

Liabilities

• Accounts Payable ↑ $+367$ (free source of operating funding).
• Short-Term Portion of LT Debt ↓ $-232$ (current maturity paid off).
• Current Liabilities ↑ $+135$.
• Long-Term Debt ↓ $-1{,}978$ (principal amortisation).
• Net Debt Reduction $= -2{,}210$ (Short-Term + Long-Term variation).
• Capital (Par value) unchanged at $3{,}500$.
• Retained Earnings ↑ $+817$ ( ties directly to dividend policy – see below ).
• Net Worth (Equity) ↑ $+2{,}999$ (driven by NI & retained earnings).
• Balance check: Total Liabilities match Total Assets for both periods ($29{,}970$ → $31{,}126$).

Key Accounting Concepts & Definitions

• Depreciation
  • Non-cash allocation of tangible-asset cost across useful life.
• EBITDA vs Cash Flow
  • EBITDA strips out depreciation but still ignores working-capital requirements, CAPEX, taxes, and interest.
• Working Capital (WC)
  • $WC =\text{Non-cash Current Assets} - \text{Operating Current Liabilities}$.
  • Increases in WC consume cash; decreases generate cash.
• CAPEX (Capital Expenditure)
  • $CAPEX = (\Delta \text{Net FA}) + \text{Depreciation}$.
  • Positive CAPEX = cash outflow for new fixed assets.
• Cash-Flow Statement – Financial (or “indirect”) Version
  • Splits cash movements into Operating, Investing, and Financing blocks but reallocates interest and dividends to “Financing” to emphasise cash available for creditors & shareholders (Free Cash Flow).

Building the 2016 Financial Cash-Flow Statement – Step-by-Step

1 Cash Flow from Operations (CFO)

1. Start with Net Income: $+3{,}816$
2. Add back non-cash charges: Depreciation $+1{,}711$
3. Adjust for Working-Capital movements (exclude cash & debt):
   • Accounts Receivable ↑ $-255$
   • Inventory ↑ $-172$
   • Accounts Payable ↑ $+367$
   • Net WC change $= -60$ (cash outflow)
4. CFO (indirect) $= 3{,}816 + 1{,}711 - 60 = 5{,}467$

2 Cash Flow from Investing (CFI)

• CAPEX (gross FA growth) $-873$ (cash outflow)
• No disposals, acquisitions, or other investing lines reported.
• CFI $= -873$

3 Free Cash Flow (FCF)

• $FCF = CFO + CFI = 5{,}467 - 873 = 4{,}594$
• Represents the cash the firm generated before servicing capital providers.

4 Cash Flow from Financing (CFF)

• Debt Principal Movements
  • Long-Term Debt ↓ $-1{,}978$
  • Short-Term Portion of LT Debt ↓ $-232$
  • Total Debt Cash Out $= -2{,}210$
• Dividends to Shareholders
  • Compute from retained earnings reconciliation:
  $\text{Dividends} = NI - (\Delta \text{Retained Earnings})$
  $= 3{,}816 - 817 = 2{,}999$
  (cash outflow)
• No new equity issued (Capital constant).
• CFF $= -2{,}210 - 2,999 = -5{,}209$

5 Net Increase (Decrease) in Cash

• $\Delta \text{Cash} = CFO + CFI + CFF = 5{,}467 - 873 - 5,209 = -615$
• Yet the balance sheet shows Cash ↑ $+1,567$. → Indicates either:
  1. Certain interest outflow ($1,845$) was treated inside NI but should be reclassified to CFF in the financial version, or
  2. Additional non-disclosed investing/financing items (e.g., asset sale, new short-term facilities).
• Reconciling variant (strict “financial” format):
  • Remove after-tax interest from CFO and shift to CFF.
  • Adjusted figures will align the $+1,567$ change.

Full “Financial Version” Layout (Conceptual)

• Operating Cash Flow (before financial costs)
  $OCF = EBIT + Depreciation - Taxes_{\text{cash}} - \Delta WC$
• CAPEX
  $CAPEX = \Delta Gross\;FA$
• Free Cash Flow to the Firm
  $FCF = OCF - CAPEX$
• Cash Flow to Creditors
  $= - (Principal\;Repayments) - (Interest\;Paid)$
• Cash Flow to Shareholders
  $= - (Dividends) \; (+/-\;New\;Equity)$
• Net Cash Change
  $\Delta Cash = FCF + CF<em>{Creditors} + CF</em>{Shareholders}$

Interpretations & Practical Implications

• Positive FCF ($4,594$) indicates robust internal generation; however, management prioritised heavy dividend payout ($2,999$) and debt reduction ($2,210$).
• Debt service strategy lowered leverage (LT Debt now 56 % of total assets vs 64 % one year earlier), reducing future interest burden.
• Large dividend relative to NI ( payout ratio ≈ $\frac{2{,}999}{3{,}816}\approx79\%$ ) might limit reinvestment capacity unless growth is low or external financing remains available.
• CAPEX only $873$ → suggests either asset-light model or maintenance rather than expansion.
• Ethical / Governance angle: distributing nearly all profits while trimming debt may placate both lenders and shareholders but could under‐invest in innovation.

Connections to Earlier Lectures / Wider Finance Topics

• The reconciliation technique re-emphasises the three-statement model: Income → Balance Sheet → Cash Flow.
• The treatment of interest & dividends echoes discussions on IFRS vs US GAAP presentation options.
• Free Cash Flow is the foundational driver behind Discounted Cash Flow (DCF) valuation covered in prior Corporate Finance modules.
• Working-capital management ties into Operational Finance (Lecture 4) that linked inventory days, receivable days, and payable days to liquidity.
• Debt reduction debate links to Capital‐Structure Theory (Modigliani–Miller, Trade-Off, Pecking Order).

Numerical Summary (All Key Figures in € 000)

• CFO $5,467$
• CAPEX $-873$
• FCF $4,594$
• Debt Principal $-2,210$
• Dividends $-2,999$
• Net Δ Cash (calculated) $-615$ vs Reported $+1,567$ – difference flags re-classification needs.