ActSc371_Lecture 4_Chapter 2 (Ross)

ActSc371_Lecture 4_Chapter 2 (Ross) - Lecture 4 Sections...

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Unformatted text preview: Lecture 4 Sections 2.4 and 2.A from Chapter 2: Introduction to Corporate Finance (Corporate Finance by Ross et al.) ActSc 371 – Corporate Finance 1 Instructor: Dr. Lysa Porth 1 Introduction Introduction to Corporate Finance • 2.4 Financial Cash Flow • 2.A Financial Statement Analysis 2 Accounting Statements and Cash Flow 2.4 Financial Cash Flow • Cash Flow: the most important item that can be extracted from financial statements. • Statement of cash flows: helps to explain the change in accounting cash and equivalents. • Remember: the financial perspective values the firm by its ability to generate financial cash flow. • Cash flow is not the same as net working capital. • Increasing inventory requires using cash. • Inventories and cash are both current assets, this does not affect net working capital. • An increase in a particular net working capital account (i.e. inventory), is associated with decreasing cash flow. 3 Accounting Statements and Cash Flow 2.4 Financial Cash Flow Cont’d CF (A) = CF (B) + CF (S) • The first step in determining a firm’s cash flows is to figure out the cash flow from operations. • Operating cash flow reflects tax payments, but not financing, capital spending, or changes in net working capital. • Another important component of cash flow involves changes in long- term assets. • The net change in long-term assets equals sales of long-term assets minus the acquisition of long-term assets. The result is the cash flow used for capital spending. • Cash flows are also use d for making investments in net working capital. • Cash flow of the firm is also paid to shareholders. It is the sum of dividends plus net new equity from repurchasing outstanding shares of stock and issuing new shares of stock. 4 Accounting Statements and Cash Flow Some Important Observations About Cash Flows 1. Types of cash flow • Cash flow from operations: defined as earnings before interest and depreciation minus taxes, measures the cash generated from operations, not counting capital spending or working capital requirements. It is usually positive, and is negative when a firm is in trouble. • Total cash flow of the firm: includes adjustments for capital spending and additions to net working capital. It is frequently negative because during growth, spending on inventory and fixed assets can be more than cash flow from sales. • Note: positive isn’t always a sign of financial health. Firms with negative cash flow from operation could show positive total cash flow temporarily by selling assets (i.e. airline industry in 1990’s). 5 Accounting Statements and Cash Flow Some Important Observations About Cash Flows Cont’d 2. Net income is not cash flow. The two numbers are not usually the same. In determining the economic and financial condition of a firm, cash flow is more revealing....
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This note was uploaded on 12/16/2011 for the course ACSTC 371 taught by Professor Lisaporth during the Fall '11 term at Waterloo.

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ActSc371_Lecture 4_Chapter 2 (Ross) - Lecture 4 Sections...

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