Week05_LectureSlides_pt1
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Week 5 (part 1)
ACCT1511: AFM1B
CFS5: Decision Usefulness of Cash f l f h Flows
Peter Lam Quad 3069 m@.auቤተ መጻሕፍቲ ባይዱ
Cash from Operating Activities Receipt from customers Payment to suppliers Payment for insurance Payment for other expenses Payment for interest Payment for income tax Net cash flow from operating activities Cash from Investing Activities Disposal of equipment Purchase of land & buildings Purchase of equipment q p Net cash flow from investing activities Cash from Financing Activities Repayment of borrowings Repayment of lease liability Direct Proceeds from share issue Payment of interim dividend Payment of final dividend Net cash flow from financing activities Net Cash Inflow Cash opening balance Cash closing balance
it going (use), and why (purpose)?
How much is the cash inflow or outflow? Is the cash fl h h flow recurring? i When will the cash flow occur? Will the cash flow affect some other cash flows?
First Chicago) were owed more than $400m
Hooker Corp: Net Profit & CFO
Net Profit
100 0 79 $M -100 -200 -300 80
81
82
83
84
85
86
87
88
CFO
Year (1979 - 1988)
2
Annual Report Financial Statements Income Statement
or are they struggling to pay suppliers?
4
1. Relating the Financial Statements
If the company is improving its management of
inventory and debtor collection, then:
1. Relating the Financial Statements
E.g., Collection of Accounts Receivable
̶ If balance sheet shows:
Accounts Receivable
̶ And income statement shows:
Hooker Corp: NP & CFO
100 0 79 $M -100 80
Net Profit
81
82
83
84
85
86
87
88
CFO
-200 -300 Year (1979 - 1988)
5
2. Examining CFO and Total Cash Flows
What if the company has positive CFO? Should examine how well cash is managed:
Sales Revenue steady
̶ Should check cash flow statement to see:
What is happening to Cash from Customers?
1. Relating the Financial Statements
E.g., Payment of Accounts Payable
607 (215) (65) (65) (40) (40) 182 60 (10) (100) ( ) (50)
Method
(50) (10) 38 (40) (60) (122) 10 20 30
Speed Buy Ltd. Cash Flow Statement for the Year Ended 31 December 2005 Cash flows from operating activities: Net profit after tax $86,400 Add: Depreciation $31,000 Deduct: Gain on sale of investments $(85,000) Add: Decrease in accounts receivable Deduct: Increase in inventory Deduct: Increase in prepaid expenses Deduct: Decrease in accounts payable Net cash flow from operating activities Cash flows from investing activities: Cash received from investments sold Cash paid for purchase of store equipment Net cash flow from investing activities Cash flows from financing activities: Cash paid for dividends Net cash flow used for financing activities Increase in cash Cash at beginning of the year Cash at end of the year $11,500 $(12,000) $(15,000) $(13,000) $3,900
3. Pay future dividends
– Avoid losing favor with investors
3
How to Analyze the Statement of Cash Flows?
1. Relate the Cash Flow Statement to the Balance Sheet and Income Statement 2. Examine the cash flows from operations (CFO) and total net cash flows 3. Examine the relationship between cash flows from operating, investing and financing activities 4. Calculate cash flow ratios
• revenues • expenses
Balance Sheet
• assets • liabilities • owners’ equity owners
Statement of Cash Flows
Five Important Questions
Where is the cash flow coming from (source) or where is
– Paying off debt (financing CF) – Paying dividends (financing CF) – Buying more non-current assets (investing CF) – Buying securities (investing CF)
3. Relating Operating, Investing & Financing Cash Flows
2. Examining CFO and Total Cash Flows
Examine cash flows from operations:
– A company that has negative CFO over an extended period is in trouble. Why? – Recall Hooker Corp Recall: Corp.
Assess ability of firm to:
1. Generate future cash flows
– For internal funding of capital expenditure
2. Continue meeting its financial obligations
– Avoid going into bankruptcy
Source: King, T.E., V.C. Lembke & J.H. Smith. (2001). Financial Accounting. (2nd ed.). John Wiley & Sons, p. 73
Why is Cash Flow Information Important and To Whom?
Examining the relationship between cash flows
from operating, investing and financing activities can also indicate the maturity of a business – Life cycle of firms y
$M (A AUD)
Profit
Would you Invest in this Company?
Would you invest in Hooker Corp?
A ‘premier’ Australian real estate development
company
Collapsed in July 1989 Banks (WBC, CBA, SBNSW, Citibank, First Fidelity,
̶ If balance sheet shows:
Inventory
and Accounts Payable
̶ Should check both income statement and cash flow statement:
Are they straining to keep up inventory levels,
– Inventory and Accounts Receivable should be (BS) – S l R Sales Revenue should b close t C h from h ld be l to Cash f Customers (IS and CFS) – COGS should be close to Cash Paid to Suppliers (IS and CFS)
$130,000 $(51,000)Indirect Method 79,000
$(40,000) (40,000) $42,900 $27,500 $70,400
1
Would you Invest in this Company?
80 70 60 50 40 30 20 10 0 79 80 81 82 83 84 85 86 87 88 Year (1979 - 1988)
Life Cycle of Firms
Inception / growth
– young firms, new start-ups, seek capital to invest in projects, often not generating large amounts of operating cash flows
ACCT1511: AFM1B
CFS5: Decision Usefulness of Cash f l f h Flows
Peter Lam Quad 3069 m@.auቤተ መጻሕፍቲ ባይዱ
Cash from Operating Activities Receipt from customers Payment to suppliers Payment for insurance Payment for other expenses Payment for interest Payment for income tax Net cash flow from operating activities Cash from Investing Activities Disposal of equipment Purchase of land & buildings Purchase of equipment q p Net cash flow from investing activities Cash from Financing Activities Repayment of borrowings Repayment of lease liability Direct Proceeds from share issue Payment of interim dividend Payment of final dividend Net cash flow from financing activities Net Cash Inflow Cash opening balance Cash closing balance
it going (use), and why (purpose)?
How much is the cash inflow or outflow? Is the cash fl h h flow recurring? i When will the cash flow occur? Will the cash flow affect some other cash flows?
First Chicago) were owed more than $400m
Hooker Corp: Net Profit & CFO
Net Profit
100 0 79 $M -100 -200 -300 80
81
82
83
84
85
86
87
88
CFO
Year (1979 - 1988)
2
Annual Report Financial Statements Income Statement
or are they struggling to pay suppliers?
4
1. Relating the Financial Statements
If the company is improving its management of
inventory and debtor collection, then:
1. Relating the Financial Statements
E.g., Collection of Accounts Receivable
̶ If balance sheet shows:
Accounts Receivable
̶ And income statement shows:
Hooker Corp: NP & CFO
100 0 79 $M -100 80
Net Profit
81
82
83
84
85
86
87
88
CFO
-200 -300 Year (1979 - 1988)
5
2. Examining CFO and Total Cash Flows
What if the company has positive CFO? Should examine how well cash is managed:
Sales Revenue steady
̶ Should check cash flow statement to see:
What is happening to Cash from Customers?
1. Relating the Financial Statements
E.g., Payment of Accounts Payable
607 (215) (65) (65) (40) (40) 182 60 (10) (100) ( ) (50)
Method
(50) (10) 38 (40) (60) (122) 10 20 30
Speed Buy Ltd. Cash Flow Statement for the Year Ended 31 December 2005 Cash flows from operating activities: Net profit after tax $86,400 Add: Depreciation $31,000 Deduct: Gain on sale of investments $(85,000) Add: Decrease in accounts receivable Deduct: Increase in inventory Deduct: Increase in prepaid expenses Deduct: Decrease in accounts payable Net cash flow from operating activities Cash flows from investing activities: Cash received from investments sold Cash paid for purchase of store equipment Net cash flow from investing activities Cash flows from financing activities: Cash paid for dividends Net cash flow used for financing activities Increase in cash Cash at beginning of the year Cash at end of the year $11,500 $(12,000) $(15,000) $(13,000) $3,900
3. Pay future dividends
– Avoid losing favor with investors
3
How to Analyze the Statement of Cash Flows?
1. Relate the Cash Flow Statement to the Balance Sheet and Income Statement 2. Examine the cash flows from operations (CFO) and total net cash flows 3. Examine the relationship between cash flows from operating, investing and financing activities 4. Calculate cash flow ratios
• revenues • expenses
Balance Sheet
• assets • liabilities • owners’ equity owners
Statement of Cash Flows
Five Important Questions
Where is the cash flow coming from (source) or where is
– Paying off debt (financing CF) – Paying dividends (financing CF) – Buying more non-current assets (investing CF) – Buying securities (investing CF)
3. Relating Operating, Investing & Financing Cash Flows
2. Examining CFO and Total Cash Flows
Examine cash flows from operations:
– A company that has negative CFO over an extended period is in trouble. Why? – Recall Hooker Corp Recall: Corp.
Assess ability of firm to:
1. Generate future cash flows
– For internal funding of capital expenditure
2. Continue meeting its financial obligations
– Avoid going into bankruptcy
Source: King, T.E., V.C. Lembke & J.H. Smith. (2001). Financial Accounting. (2nd ed.). John Wiley & Sons, p. 73
Why is Cash Flow Information Important and To Whom?
Examining the relationship between cash flows
from operating, investing and financing activities can also indicate the maturity of a business – Life cycle of firms y
$M (A AUD)
Profit
Would you Invest in this Company?
Would you invest in Hooker Corp?
A ‘premier’ Australian real estate development
company
Collapsed in July 1989 Banks (WBC, CBA, SBNSW, Citibank, First Fidelity,
̶ If balance sheet shows:
Inventory
and Accounts Payable
̶ Should check both income statement and cash flow statement:
Are they straining to keep up inventory levels,
– Inventory and Accounts Receivable should be (BS) – S l R Sales Revenue should b close t C h from h ld be l to Cash f Customers (IS and CFS) – COGS should be close to Cash Paid to Suppliers (IS and CFS)
$130,000 $(51,000)Indirect Method 79,000
$(40,000) (40,000) $42,900 $27,500 $70,400
1
Would you Invest in this Company?
80 70 60 50 40 30 20 10 0 79 80 81 82 83 84 85 86 87 88 Year (1979 - 1988)
Life Cycle of Firms
Inception / growth
– young firms, new start-ups, seek capital to invest in projects, often not generating large amounts of operating cash flows