财务报表分析ch07

1、Financial Statement AnalysisK R SubramanyamJohn J Wild07CHAPTERCash Flow Analysis2A Look At This ChapterIn this chapter we analyze cash flow measures for insights into all business activities, with special emphasis on operations. Attention is directed at company and business conditions when interpre

2、ting cash flows. We also consider alternative measures of cash flows.3Analysis ObjectivesExplain the relevance of cash flows in analyzing business activitiesDescribe the reporting of cash flows by business activitiesInterpret cash flows from operating activitiesAnalyze cash flows under alternative c

3、ompany and business conditionsDescribe alternative measures of cash flows and their usefulness4Statement of Cash Flows Cash is the most liquid of assets.Offers both liquidity and flexibility. Both the beginning and the end of a companys operating cycle.Contrast: Accrual accounting and Cash basis acc

4、ountingFinancial statements analysis recognizes that accrual accounting, where companies recognize revenue when earned and expenses when incurred, differs from cash basis accounting.Relevance of Cash5Statement of Cash FlowsNet cash flow is the end measure of profitability. It is cash, not income, th

5、at ultimately repays loans, replace equipment, expands facilities, and pays dividends. Accordingly, analyzing a companys cash inflows and outflows, and their operating, financing, or investing sources, is one of the most important investigative exercises.Cash flow analysis helps in assessing liquidi

6、ty, solvency, and financial flexibility.Relevance of Cash6Statement of Cash FlowsLiquidity(流动性) is the nearness to cash of assets and liabilitiesSolvency（偿债能力） is the ability to pay liabilities when they mature.Financial flexibility (财务灵活性) is the ability to react and adjust to opportunities and adv

7、ersities.7Statement of Cash Flows Statement of cash flows (SCF) helps address questions such as:How much cash is generated from or used in operations?What expenditures are made with cash from operations?How are dividends paid when confronting an operating loss?What is the source of cash for debt pay

8、ments?How is the increase in investments financed?What is the source of cash for new plant assets?Why is cash lower when income increased?What is the use of cash received from new financing?Relevance of Cash8Statement of Cash Flows The SCF reports cash receipts and cash payments by operating, financ

9、ing, and investing activities:Operating activities are the earning-related activities of a company. Reporting by ActivitiesBeyond revenue and expense activities represented in an income statement, they include the net inflows and outflows of cash resulting from related operating activities like exte

10、nding credit to customers, investing in inventories, and obtaining credit from suppliers.9Statement of Cash FlowsInvesting activities are means of acquiring and disposing of noncash assets. Involve assets expected to generate income; lending funds and collecting the principal on these loans. Financi

11、ng activities are means of contributing, withdrawing, and servicing funds to support business activities. Include borrowing and repaying funds with bonds and other loans; contributions and withdrawals by owners and their return on investment.Reporting by Activities10Statement of Cash FlowsReporting

12、by Activities11Statement of Cash Flows There are two acceptable methods for reporting cash flows from operations: Indirect and Direct methodsConstructing the Cash Flow Statement12Statement of Cash FlowsIndirect MethodNet income is adjusted for non-cash income (expense) items and accruals to yield ca

13、sh flow from operations.The advantage: the disclosure of a reconciliation of differences between net income and operating cash flows.This can aid some users that predict cash flows by first predicting income and then adjusting income for leads and lags between income and cash flows.The indirect meth

14、od is most commonly employed in practice and we use it initially to illustrate preparation of the statement of cash flows.13Statement of Cash FlowsDirect MethodEach income item is adjusted for its related accrualsBoth methods yield identical results-only the presentation format differs.14Statement o

15、f Cash FlowsUnder the accrual basis of accounting, which of the following statements is true? I. Reported net income provides a measure of operating performanceII. Revenue is recognized when cash is received, and expenses are recognized when payment is madeIII. Cash inflows are recognized when they

16、are received, and cash outflows are recognized when they are madeA.I onlyB.III onlyC.I and IIID.I, II and III15c16Statement of Cash FlowsThe statement of cash flows is a blend of the income statement and the balance sheet. Net income is first adjusted for noncash income and expense items to yield ca

17、sh profits which are, then, further adjusted for cash generated and used by balance sheet transactions to yield cash flows from operations, as well as investing and financing activities.17Statement of Cash Flows Consider first the net cash from operations.Preparation of the SCF (Indirect method)18St

18、atement of Cash Flows Depreciation and amortization add-back.Preparation of the Statement of Cash Flows19Statement of Cash Flows Income v/s Cash Flows - ExampleConsider a $100 sale on accountIn period of sale, net income is increased by $100 but no cash has been generated.Net Income100Depreciation a

19、nd amortization expense 0Gains (losses) on sale of assets 0Change in accounts receivable (100)Net Cash flow from operations 0In period of collection no income is recorded.Net Income 0Depreciation and amortization expense 0Gains (losses) on sale of assets 0Change in accounts receivable 100Net Cash fl

20、ow from operations10020Statement of Cash Flows Adjustments for changes in balance sheet accounts can be summarized as follows:Preparation of the Statement of Cash Flows21Statement of Cash Flows Constructing the StatementThe company purchased a truck during the year at a cost of $30,000 that was fina

21、nced in full by the manufacturer.2. A truck with a cost of $10,000 and a net book value of $2,000 was sold during the year for $7,000. There were no other sales of depreciable assets.3. Dividends paid during Year 2 are $51,00022Statement of Cash Flows Steps in Constructing the StatementStart with Ne

22、t IncomeAdjust Net Income for non-cash expenses and gainsRecognize cash inflows (outflows) from changes in current assets and liabilitiesSum to yield net cash flows from operationsChanges in long-term assets yield net cash flows from investing activitiesChanges in long-term liabilities and equity ac

23、counts yield net cash flows from financing activitiesSum cash flows from operations, investing, and financing activities to yield net change in cash(8)Add net change in cash to the beginning cash balance to yield ending cash23Statement of Cash Flows 24Analysis Implications of Cash Flows Some limitat

24、ions of the current reporting of cash flow:Practice does not require separate disclosure of cash flows pertaining to either extraordinary items or discontinued operations.Interest and dividends received and interest paid are classified as operating cash flows. Many users consider interest paid a fin

25、ancing outflow, and interest and dividends received as cash inflows from investing activities.Income taxes are classified as operating cash flows. This classification can distort analysis of the three individual activities if significant tax benefits or costs are attributed to them in a disproportio

26、nate manner.Limitations in Cash Flow Reporting25Analysis Implications of Cash FlowsWhich of the following would require an adjustment in the computation of cash flow from operations using the indirect method? I. Depreciation expenseII. Loss on sale of assetIII. Sale of services to costumers for cash

27、IV. Utility bill received and paid in cashA.IB.I and IIC.I and IIID.IV26Analysis Implications of Cash FlowsBeginning and ending accounts receivable are $76,000 and $42,000, respectively. Sales for the period total $384,000, of which $40,000 was directly for cash. How much cash was collected from mak

28、ing sales and collecting accounts receivable?A.$344,000B.$418,000C.$378,000D.$376,00027Analysis Implications of Cash FlowsBeginning accounts receivable are $76,000. Sales for the period total $384,000, of which $40,000 was directly for cash. $418,000 was collected from making sales and collecting ac

29、counts receivable. What is the ending balance for accounts receivable?A.$42,000B.$2,000C.$82,000D.$68,00028BBA29Analysis Implications of Cash Flows 30Q. Linking Operating Cash Flows with Earnings QualityIn reviewing the financial statements of a company, you discover that net income increased while

30、operating cash flows decreased for the most recent two consecutive years.Required:a. Explain how net income could increase while its operating cash flows decrease. Your answer should include three illustrative examples.b. Describe how operating cash flows can serve as one indicator of earnings quali

31、ty.31Q. Linking Operating Cash Flows with Earnings QualityA.Revenues are, in certain instances, recognized before cash is received (that is, when earned,eg. credit sale). Expenses are, in certain instances, recognized after cash is paid (that is, matched with revenues). As a result, net income can b

32、e positive when operating cash flows are negative. 32Q. Linking Operating Cash Flows with Earnings Quality examples: (1) If accounts receivable increase substantially during the year, this implies that revenues outpaced cash collections. (2) If a company builds up its inventory levels substantially,

33、 then cash is paid out but no expense is recognized. (3) If the company reduces its accounts payable balances substantially during the year, then cash flows can be negative when net income is positive.33Q. Linking Operating Cash Flows with Earnings QualityB. Operating cash flows can serve as one ind

34、icator of earnings quality because over a number of years, cash flows should approximate earnings. If cash flows from operations are consistently lower than earnings, it is possible that the reported earnings are not of high quality. (As with any broad guideline, one must look for corroborating evid

35、ence.)34Analysis Implications of Cash Flows Interpreting Cash Flows and Net Income35Analysis Implications of Cash Flows An income statement records revenues when earned and expenses when incurred. It does not show the timing of cash inflows and outflows, nor the effect of operations on liquidity and

36、 solvency. This information is available in the SCF.Cash flows from operations (CFO) is a broader view of operating activities than is net income. It is not a measure of profitability.Note: A net measure, be it net income or cash flows from operations, is of limited usefulness. The key is informatio

37、n about components of these net measures.Interpreting Cash Flows and Net Income36Analysis Implications of Cash Flows Accounting accruals determining net income rely on estimates, deferrals, allocations, and valuations.SubjectivityNote: CFO effectively serve as a check on net income, but not a substi

38、tute for net income.CFO exclude elements of revenues and expenses not currently affecting cash. Our analysis of operations and profitability should not proceed without considering these elements. Interpreting Cash Flows and Net Income37Analysis of Cash Flows In evaluating sources and uses of cash, t

39、he analyst should focus on questions like:Are asset replacements financed from internal or external funds?What are the financing sources of expansion and business acquisitions?Is the company dependent on external financing?What are the companys investing demands and opportunities?What are the requir

40、ements and types of financing?Are managerial policies (such as dividends) highly sensitive to cash flows?38Analysis of Cash FlowsCase Analysis of Cash Flows of Campbell Soup39Analysis of Cash Flows Inferences from analysis of cash flows include:Where management committed its resourcesWhere it reduce

41、d investmentsWhere additional cash was derived fromWhere claims against the company were reducedDisposition of earnings and the investment of discretionary cash flowsThe size, composition, pattern, and stability of operating cash flowsInferences from Analysis of Cash Flows40Analysis of Cash Flows Fr

42、ee Cash FlowA useful analytical derivative of the statement of cash flows is the computation of free cash flow41Analysis of Cash Flows Growth and financial flexibility depend on adequate free cash flow. Free Cash FlowPositive free cash flow reflects the amount available for business activities after

43、 allowances for financing and investing requirements to maintain productive capacity at current levels.42Analysis of Cash Flows The SCF is useful in identifying misleading or erroneous operating results or expectations.Cash Flow as ValidatorsSCF provides us with important clues on:Feasibility of financing capital