Lecture notes S2 L 6 - 1 1 Cash Flow Analysis Subramanyam...

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Unformatted text preview: 1 1 Cash Flow Analysis Subramanyam and Wild, Ch. 7 Robinson, Greuning, Henry, Broihahn, Ch. 6 Palepu & Healy, Ch. 5 2 Key Concepts and objectives Cash flow analysis is a primary tool in financial analysis: It is used to evaluate liquidity and the management of operating, investing, and financing activities as they relate to cash flow. The key objectives in cash flow analysis are: Understand and appreciate the importance of cash flows in business activities 2 3 Key Concepts and objectives Contrast cash flows from operating, investing and financing activities Understand the difference between the direct and indirect methods of presenting cash flows from operating activities Understand how the cash flow statement is linked to the income statement and the balance sheet Analyse and interpret cash flow statement 4 Statement of Cash Flows Cash is the most liquid of assets. Offers both liquidity and flexibility. It is both the beginning and the end of a companys operating cycle. Cash flow analysis helps in assessing liquidity, solvency, and financial flexibility. Relevance of Cash 3 5 Statement of Cash Flows (SCF) Reporting by Activities The SCF reports cash receipts and cash payments by operating , financing , and investing activities Operating activities are the earning- related activities of a company including: revenue and expense activities extending credit to customers investing in inventories obtaining credit from suppliers 6 Statement of Cash Flows Reporting by Activities Investing activities are means of acquiring and disposing of noncash assets Involve acquisition of assets expected to generate income; investment in securities and lending funds Financing 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. 4 7 Statement of Cash Flows A number of questions can be answered through analysis of the statement of cash flow. For example: Operating activities How strong is the firms internal cash flow generation? How well is working capital being managed? Investing activities How much cash did the company invest in growth assets? Financing activities What type of external financing does the company rely on? Did the company use internally generated funds for investments? Did the company use internally generated funds to pay dividends? 8 Statement of Cash Flows Indirect Method Net income is adjusted for non-cash items and accruals to yield cash flow from operations Direct Method Each income statement item is adjusted from accruals to cash basis Both methods yield identical results Only the presentation format differs Constructing the Cash Flow Statement 5 9 Preparation of the Statement of Cash Flows (Indirect method)...
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This note was uploaded on 08/27/2011 for the course CORPFIN 7827 taught by Professor Prokim during the Three '11 term at University of Adelaide.

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Lecture notes S2 L 6 - 1 1 Cash Flow Analysis Subramanyam...

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