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Lecture 4

MGMT 3320 Lecture 4: Lecture 4 Notes - SCF Practicum


Department
Management
Course Code
MGMT 3320
Professor
N A
Lecture
4

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MGMT*3320
Lecture 4 Notes – Statement of Cash Flow Practicum
Building a Statement of Cash Flow: Basics
Start from an income statement and a balance sheet in good
form
SCF: CF operating + CF Investing + CF Financing = Change in
Cash
oCF from
Operating Activities
:
Direct Method
Receipt from customers – payments to
suppliers and employees, interest paid and
income tax paid
Indirect Method (
Pro1t for year, +/- adjustments such as, +
depreciation and amortization, - changes in
assets (payables, inventories, prepaid, etc.) +
changes in liabilities (payables, etc.)
oCF from
Investing Activities
:
PPE (Purchase/Sales), equity investments
(purchase/sales), etc.
oCF from
Financing Activities
:
Bank loans, LT debts, etc.
** Note that a change in cash is in itself a use (cash up) or a source
(Cash dn) of cash.
What to look for:
oLook for overall composition of uses and sources; consider
changes over time; does this look like a solid and stable
company? Put in broader context using info from other
sources (market etc) to provide context. Ex: is it generating
a lot of cash, mostly from op. Activities, with limited use of
credit sources, with parsimonious investment in long term
assets, properly 1nanced (i.e. avoid term mismatch, do not
1nance LT assets with ST debt)
oTo facilitate analysis complete a vertical analysis. To do so
calculate the % “share” of each item (measured as % of all
sources or uses of cash); this is a quick indication of
importance and as this changes of evolution in company
operations and cash mgm activities / 1n. Health. Look at
trend over time (do not be dogmatic, noise is always
present)
oTo facilitate analysis of sensitivity (seen later), consider
calculating a set of 1nancial ratios (from raw data or basic
1n statements) and comment these and their changes
together with the SCF. What you are looking for is a higher
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