Cash from financing & Cash From Investing

Cash from Investing and Financing Activities Overview

  • The video addresses cash flows from investing and financing activities.

  • Cash from investing is more straightforward than cash from operating activities.

  • It primarily tracks additions and reductions to fixed assets and investments over a year.

  • This corresponds mainly to the long-term asset side of the balance sheet.

Cash from Investing Activities

  • Definition: This section captures cash flows related specifically to long-term investments and assets.

    • Includes purchases and sales of fixed assets and investments.

Common Inflows and Outflows

  • Capital Expenditures:

    • Typically the largest cash outflow in the cash from investing section.

    • Includes acquisitions of tangible fixed assets (e.g., buildings, machinery).

  • Intangible Assets:

    • Also represents significant cash outflows when purchased.

  • Asset Sales:

    • Represent cash inflows when fixed or intangible assets are sold.

    • More common to sell fixed assets rather than intangible assets, with some exceptions.

  • Securities Transactions:

    • Inflows and outflows from purchases and sales of debt and equity securities.

    • Different than transactions involving fixed and intangible assets as they are not usually core operations.

Procter and Gamble Example

  • Investing section for Procter and Gamble presented below cash from operations section.

  • Capital expenditures noted as the largest cash outflow.

  • In 2013:

    • Purchase of investment securities: over $1.5 billion (an outflow).

    • Cash generated from selling assets (e.g., $3 billion in 2012 but only $500 million in 2013).

Cash from Financing Activities

  • Definition: Tracks changes in the sources of debt and equity financing.

    • Corresponds primarily to the liabilities and shareholders' equity sections of the balance sheet.

Common Inflows and Outflows

  • Debt Financing:

    • Cash inflow occurs when debt is issued.

    • Cash outflow occurs when debt is repaid.

  • Equity Financing:

    • Cash inflow results from issuing stock.

    • Cash outflow results from buying back shares.

  • Dividends:

    • Significant outflows for many companies, including both common and preferred dividends.

Procter and Gamble Example

  • In 2013, major financing activities included:

    • Dividends issued: approximately $6.5 billion (an outflow).

    • Share repurchases: $6 billion (outflow).

    • Additional borrowings:

    • Short-term debt: $3.4 billion (inflow).

    • Long-term debt: $2.3 billion (inflow).

    • Debt repaid: $3.7 billion (outflow).

    • Net increase in debt: approximately $2 billion during the year.

  • Proceeds from stock options:

    • Generally not significant for most companies.

Exchange Rate Considerations

  • Effects of exchange rates addition to cash flow statements, reflecting inflows and outflows due to currency conversions for global operations, recorded at the end of the statement.

Net Change in Cash and Equivalents

  • Net Change Calculation:

    • Summarizes cash from operations, investing, and financing activities cumulatively.

    • For Procter and Gamble:

    • Total outflows from financing activities: $7 billion.

    • Total outflows from investing activities: $6 billion.

    • Combined outflows: $13 billion.

  • Despite the significant outflow, positive net change in cash of $1.5 billion for the year.

  • Beginning cash balance: ~$4.5 billion.

  • Year-end cash: $5.9 billion.

Conclusion: The Role of Cash Flow Statements

  • Cash flow statement acts as a "magnifying glass" for the cash line on the balance sheet.

  • Income Statement: Highlights year-over-year changes affecting retained earnings.

  • Cash Flow Statement: Identifies year-over-year changes impacting cash balances through:

    • Cash from Operations: Effects of retained earnings and working capital adjustments.

    • Cash from Investing: Changes in long-term assets.

    • Cash from Financing: Changes in long-term liabilities and equity.

Practical Exercise

  • Prepare for completing the lemonade stand exercise four:

    • Build a cash flow statement for 2015 using insights from previous exercises (income statement and balance sheets).