Indirect Statement of Cash Flows

Transcription

1 Economics /Management 4 Financial Accounting Spring 216 Indirect Statement of Cash Flows [Ugly Puppy Agg 2 nd ]

2 Accrual v. Cash Flow Accrual is about matching the inflows & outflows of resources OR CLAIMS(OBLIGATIONS) in the Earnings process - regardless of when you paid/will pay for those resources. But since liquidity is important, we want to know about the concomitant sources(uses) of cash in the Earnings process.

3 Set-up Total cash flow is the aggregate Δ in cash b/w accounting periods: Cash 1 - Cash The SCF is simply a stylized format that separately reports Cash-basis accounting processes for: 1. Operating activities 2. Investing activities 3. Financing activities

4 Illustrating the Indirect Method Look at the Ugly Puppy 2 nd period Financials.

5 Look at Cash Flow and the changes in the Balance Sheet Cash is the unique item isolate it on the LHS of the A = L + Eq Balance Sheet. Cash flow is the dependent variable in this Equation. Cash flow is the change in cash from one Balance Sheet to the next Balance Sheet. Thus, CF is the 1 st derivative of all BS w.r.t. all not Cash accounts.

6 The 2 nd Period - Aggressive 12 1 ( ) 5 1 (33) Starting Rev 14 COGS (5) GP 9 G&A ( 1) EBITDA 8 DA ( 74) EBIT 6 I ( 7) EBT ( 1) T () ( ) (17) NI ( 1)

7 56 1 (1) (74) Changes in the Balance Sheet - Period #2 minus #1 ΔBS/Δperiod = the derivative item-by-item (1) The Indirect SCF (1) = NI = the Δ RE 74 = DA = the -Δ Accum DA (1) = Less the Δ Receivables 1 = Less the Δ Inventory (4) = Less the Δ Supplies 4 = Plus the Δ Payables 7 = plus the Δ Accruals 8 CFOA (124) =less the Δ LLA is the CFIA 1 = plus the Δ IBD = plus the ΔPinK = less dividends 1 CFFA 56 Total CF

8 The S.C.F The SCF is a highly stylized financial statement. Illustrates the sources and uses of liquidity. Attributing cash flow to three activities: Operating a modified Cash Basis income statement Investing acquisition(disposition) of fixed assets, Net CAPEX Financing sources(uses) of cash through the selling(repurchasing) claims, i.e. loans or stock.

9 The Activities 1) Operating Activities. Cash flows from Revenues and Expenses plus the cash flow affects of changes in Current Assets and Current Liabilities. 2) Investing Activities: Capital expenditures or divestitures this is the purchase (or sale) of LLA s. 3) Financing Activities: Borrowing long-term money or IBD, selling stock or stock buy-backs, paying dividends.

10 History The SCF became an SEC required disclosure in 1987 when the FASB issued SFAS 95 following the W.R. Grace accounting scandal and bankruptcy. Today, however, it is too often overlooked. A late 199 s WSJ article even warned that the SCF was misleading investors. Look at Mulford & Comiskey Creative Cash Flow Reporting, Wiley (25). In any case, the SCF is, unfortunately (or fortunately) not a simple statement.

11 Fortunately, the SCF is not a simple. It takes work to learn it. Sell a man a fish make a living. Teach a man to fish.. You Idiot!

12 The Statement of Cash Flows A stylized translation of the Accrual income statement into a three-part statement of the Sources and Uses of cash: CFOA, CFIA, and CFFA. A firm s accounting choices will shape its accrual income statement and its SCF accordingly. The SCF can be expressed two ways: 1) The Direct Method 2) The Indirect Method

13 The Methods The methods only differ by the way Operating Activities are translated into cash flows. Indirect Method. Starts at the bottom of the accrual income statement (w/ NI) then restates the accrual recognitions to their modified cash-basis effects. Direct Method. Starts at the top of the accrual income statement and adjusts the 3 primary parts Revenue, COGS, & SG&A into a cash-basis..

14 Duci Accept a stipulation - the objective nature of cash flow makes it a good point of reference, so call it the truth. This stipulation makes accrual earnings a sort of nontruth, a kind of lie - maybe a white lie, maybe worse. All lies are composed of commissions and/or omissions. You can reconstitute the truth from a lie if you systematically: a) remove what was committed, and b) include what was omitted.

15 The Accrual Income Statement & its Three Basis Parts Sales v Cash Received from Customers this Period Receivables oppo Advances COGS vs. Cash Paid to Suppliers this Period Inventory oppo Payables G&A and Interest Cash paid for SG&A Expenses this period Cash paid to Banks this Period Pre-Paids & Supplies oppo Accruals

16 The Working Capital operating Accounts The Working Capital Accounts 1. Receivables when customers buy, but pay later 2. Inventory stuff we buy to sell to customers later 3. Pre-paid Expenses when we pay-for-it now, but use it later 4. Supplies - when we pay-for-it now, but use it later. 5. Unearned Revenue cash from customers before the sale 6. Payables when we purchase inventory but pay later 7. Accrued Expenses when we use something but pay for it later

17 Cash The Current Asset/Liability Pairings Receivables Inventory Pre-Paids LLA (Accumulated DA) Advances Payables Accruals I.B.D. Paid in Capital Retained earnings These accounts are merely memorializations of cash-to-be-collected and cash-to-be-paid

18 The SCF is the first derivative of the Balance Sheet wrt the Accounting period. Cash Flow Assets use cash Liabilities & Equity are sources of cash Assets Liabilities Increase USE SOURCE Decrease SOURCE USE