Web3ch10 - CHAPTER TEN The Analysis of the Cash Flow Statement Stephen H Penman The web page for Chapter Ten runs under the following headings What

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CHAPTER TEN The Analysis of the Cash Flow Statement Stephen H. Penman The web page for Chapter Ten runs under the following headings. What this Chapter is Doing Method 1 and Method 2 Calculation of Free Cash Flow: VF Corporation Method 2 Calculation of Free Cash Flow for a firm with Net Financial Assets: Genentech, Inc. Reformulation of the GAAP Cash Flow Statement: VF Corporation Adjusting the GAAP Statement for Changes in Cash Adjusting the GAAP Statement of Cash Flows for Transactions in Financial Assets Adjusting the GAAP Statement of Cash Flows for After-tax Net Interest Payments A Statement of Cash Generated and Cash Applied Cash Flow Statements from the United Kingdom Cash Flow Statements Prepared Under International Accounting Standards What this Chapter is Doing Chapter 10 applies the template in Chapter 7 to the reformulation of the cash flow statement. As with the balance sheet and income statement in Chapter 9, the idea is to separate cash flows that are involved in operating activities from those involved in financing activities. Figure 3.3 in Chapter 7 provides the picture. The reformulated cash flow statement reports the four cash flows of the business: C, I, d, F.
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In both equity analysis and credit analysis, it is critical to distinguish operating cash flows from financing cash flows. If you count a financing flow as an operating flow you will estimate that the business is generating more cash flow from operations to distribute to claimants. If you are using discounting cash flow valuations to value the equity, you will value the equity incorrectly. If you are calculating the liquidity provided by operations for credit analysis, you also will err. Remember the basic cash conservation equation that governs the reformulated cash flow statement: C – I = d + F The left-hand side is the net cash provided by operations (the free cash flow); the right- hand side is the cash for shareholders and debt holders (or issuers). Put a particular cash flow on the wrong side and you must get both numbers wrong. Unfortunately, GAAP statements make this mistake. They must be reformulated. Method 1 and Method 2 Calculation of Free Cash Flow: VF Corporation The web page for Chapter 8 presented a reformulated statement of shareholders’ equity for VF Corporation, and the Chapter 9 web page gave reformulated income statements and balance sheets for the firm. With these reformulated statements, the analyst can calculate free cash flow using Method 1 or Method 2 in Chapter 10: VF Corporation: Calculation of Free Cash Flow for 1998 (in thousands) Method 1: C – I = OI - ∆ΝΟΑ Operating income 1998 Net operating assets 1998 Net operating assets 1997 Free cash flow 1998 $ 2,839,980 2,351,883 $ 433,985 488,097 $(54,112) Method 2: C – I = NFE - ∆Ν FO + d Net financial expenses 1998 Net financial obligations 1998 Net financial obligations 1997 Net dividend 1998 Free cash flow 1998 $ 773,672 485,114 $ 41,120 (288,558) 193,289 $(54,149)
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This note was uploaded on 10/07/2010 for the course ECTCS ec12947322 taught by Professor Johnathayeri during the Spring '10 term at Life.

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Web3ch10 - CHAPTER TEN The Analysis of the Cash Flow Statement Stephen H Penman The web page for Chapter Ten runs under the following headings What

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