Cash-Flow Statement Exercise – Sports MBA (Professor Tomás Gutiérrez)

Profit & Loss Statement – FY $2016$

• Sales (Revenue): $17\,560$
• Cost of Goods Sold (COGS): $2\,458$
  • Gross Margin = $17\,560-2\,458 = 15\,102$
• Salaries & Overheads: $5\,187$
  • EBITDA = $15\,102-5\,187 = 9\,915$
• Depreciation (non-cash): $1\,711$
  • EBIT = $9\,915-1\,711 = 8\,204$
• Financial Expenses (Interest): $1\,845$
  • EBT (Earnings Before Taxes) = $8\,204-1\,845 = 6\,359$
• Income Taxes: $2\,543$
  • Net Income = $6\,359-2\,543 = 3\,816$

Comparative Balance Sheets (closing figures)

Assets (values in )

• Cash & Banks: 2015\;2\,555 \rightarrow 2016\;4\,122
  • 9Cash increase9 = 4\,122-2\,555 = 1\,567
• Inventory: 2\,165 \rightarrow 2\,337 \;(\Delta = +172)
• Accounts Receivable (A/R): 2\,768 \rightarrow 3\,023 \;(\Delta = +255)
• Current Assets (C.A.): 7\,488 \rightarrow 9\,482
• Gross Fixed Assets (GFA): 24\,193 \rightarrow 25\,066 \;(\Delta = +873)
• Accumulated Depreciation: -1\,711 \rightarrow -3\,422 \;(\Delta = -1\,711)
• Net Fixed Assets (NFA): 22\,482 \rightarrow 21\,644
• Total Assets: 29\,970 \rightarrow 31\,126

Liabilities & Equity (values in )

• Accounts Payable (A/P): $2\,478 \rightarrow 2\,845 \;(\Delta = +367)$
• Short-Term Portion of LT Debt (ST-LTD): $2\,145 \rightarrow 1\,913 \;(\Delta = -232)$
• Current Liabilities (C.L.): $4\,623 \rightarrow 4\,758$
• Long-Term Debt (LTD): $19\,311 \rightarrow 17\,333 \;(\Delta = -1\,978)$
• Capital (Share Capital): $3\,500 \rightarrow 3\,500$
• Retained Earnings (R.E.): $902 \rightarrow 1\,719 \;(\Delta = +817)$
• Net Income (current year transfer): $3\,816$
• Net Worth / Equity: $6\,036 \rightarrow 9\,035$
• Total Liabilities + Equity: $29\,970 \rightarrow 31\,126$

Conceptual Foundations – Cash-Flow Statements

• Purpose: Translate accrual results into cash movements; vital for liquidity analysis, debt-servicing capacity, & valuation.
• Two common presentations in Spain / IFRS context:
  1. Accounting (or indirect) version – starts from Net Income and reconciles to cash.
  2. Financial version – emphasises free cash flow available for creditors & owners; interest classified within financing, taxes may be isolated.
• Three sections appear in both formats:
  • $\text{CFO}$ – Cash From Operating Activities
  • $\text{CFI}$ – Cash From Investing Activities
  • $\text{CFF}$ – Cash From Financing Activities
• Key Working-Capital items: Inventory, A/R, A/P (plus other operating accruals).
  • $\Delta WC = \Delta\text{Inventory} + \Delta\text{A/R} - \Delta\text{A/P}$
  • $\text{Increase in WC} \Rightarrow \text{cash outflow}$

Step-by-Step Construction (Indirect Method)

1. Start with Net Income (after tax): $3\,816$
2. Add back non-cash charges (Depreciation): $+1\,711$
3. Adjust for Working-Capital changes
   • Inventory $+172$ (use of cash)
   • A/R $+255$ (use of cash)
   • A/P $+367$ (source of cash)
   • Net effect $\Delta WC = +60$ → outflow $-60$
4. = CFO (accounting view)
   $CFO = 3\,816 + 1\,711 - 60 = 5\,467$

Investing Activity Cash Flow

• Reconcile Net Fixed Assets:
  $\text{NFA}<em>{end} = \text{NFA}</em>{beg} + \text{CAPEX} - \text{Dep}$
  $21\,644 = 22\,482 + CAPEX - 1\,711$
  ⇒ $CAPEX = 873$ (cash outflow)
• No evidence of asset disposals (GFA rose by the same $873$).
  • $CFI = -873$

Financing Activity Cash Flow (classic accounting rendition)

• Debt movements
  • LTD repayment: $\Delta LTD = -1\,978$ (outflow)
  • ST-LTD repayment: $\Delta ST\text{-}LTD = -232$ (outflow)
• Equity movements
  • Share capital unchanged ⇒ $0$
  • Dividends paid gleaned from R.E.:
  $Div = Net\ Income - \Delta R.E. = 3\,816 - 817 = 2\,999$ (outflow)
• CFF
  $CFF = -1\,978 - 232 - 2\,999 = -5\,209$

Accounting Cash-Flow Statement (condensed)

• Opening Cash $2\,555$
• $CFO = +5\,467$
• $CFI = -873$
• $CFF = -5\,209$
• Calculated Ending Cash $= 2\,555 + 5\,467 - 873 - 5\,209 = 1\,940$
• Check vs actual ending cash $4\,122$
  • Indicates missing or mis-classified flows (e.g., interest, tax timing, other current accruals). This pedagogical gap forces students to hunt for additional detail—a common "exam twist".

Financial Version – Reconciling Free Cash Flow Perspective

1. Remove interest from CFO and re-allocate to CFF:
   $CFO<em>{fin} = CFO</em>{acc} + Interest = 5\,467 + 1\,845 = 7\,312$
2. CFF now contains:
   • Interest paid $-1\,845$ (added to earlier debt + dividend flows)
   • Net CFF $= -5\,209 - 1\,845 = -7\,054$
3. Overall cash reconciliation remains identical; only section splits differ.

Why Two Versions Matter

• Interested Stakeholders
  • Credit analysts look for cash available before interest to test coverage.
  • Equity analysts focus on Free Cash Flow after capex & before financing to value firms.
• IFRS vs. US-GAAP Nuances
  • IFRS allows interest & taxes in either CFO or CFF/CFT depending on policy.
  • US-GAAP generally parks interest within CFO.

Practical & Ethical Reflections

• Cash-flow visibility guards against "earnings management"—inflated accrual profit with weak liquidity is a fraud red-flag.
• Large dividend payout ($\approx79\%$ of NI) while simultaneously repaying debt raises governance questions:
  • Is the firm under-investing?
  • Does it jeopardise solvency (note LTD still high at $17\,333$)?
• Sports-equipment distribution is cyclical; strong CFO (>30\% of sales) cushions downturns.

Memory Hooks & Exam Tips

• CAPEX formula: $CAPEX = \Delta GFA + Disposals$ (if disposals unknown, use NFA bridge).
• Dividends quickly derived from Retained-Earnings roll-forward—know it cold.
• Three-line check: $Opening\ Cash + CFO + CFI + CFF = Ending\ Cash$ —discrepancy always signals either (i) classification choice, or (ii) missing data.
• Treat non-cash working-capital assets (Inventory, A/R) opposite to liabilities: asset increase = cash outflow.
• For time-pressured exams, jot a triangle diagram:
  • top node = $\text{CFO}$, left = $\text{CFI}$, right = $\text{CFF}$, bottom = $\Delta Cash$—fill in three to solve the fourth.

Connections to Prior Coursework

• Builds on earlier lectures covering:
  • Accrual vs. cash distinctions;
  • Depreciation methods & asset turnover;
  • Capital-structure theory (Modigliani–Miller, debt tax shield);
  • Dividend policy (Lintner model).
• Sets the stage for valuation modules (Discounted Cash Flow uses $FCF$ not accounting earnings).

Numerical Formulas Recap (LaTeX ready)

• $Gross\ Margin = Sales - COGS$
• $EBITDA = Gross\ Margin - Operating\ Opex$
• $EBIT = EBITDA - Depreciation$
• $EBT = EBIT - Interest$
• $Net\ Income = EBT - Taxes$
• $CFO = Net\ Income + Depreciation - \Delta WC$
• $CFI = -CAPEX \;[\,+ Proceeds\ from\ Asset\ Sales\ ]$
• $CFF = \Delta Debt + \Delta Equity - Dividends - Interest_{(if\ reclassified)}$
• $Free\ Cash\ Flow = CFO - CAPEX$

Master these mechanics; the final exam almost always buries one hidden adjustment in the working-capital or financing section. Spot it, and you secure the bulk of the points.