FIN 340 Lecture 4: Cash Flow Analysis

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8 Feb 2017
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What%is%a%level%(calculated%at%a%point%in%time)
Balance%Sheet
What%is%a%flow%(calculated%during%a%period%of%time)
Income%statement
Book%value%does%not%equal%Market%value
BV%is%based%on%historical%cost%of%assets
Does%not%count%for%intangibles
MV%measures%current%value%of%assets%and%liabilities
Net%income%does%no%equal%cash%flows
Accrual%method%rather%than%cash%basis
Show%revenues/costs%when%they%accrue,%not%when%they're%collected%or%
paid
Interested%in%cash%from%normal%business%operations
Accounting%shows%profit%as%it%is%earned%rather%than%when%companies%get%around%
to%paying%bills
Cash%outflows%into%two%categories
Current%expenses%are%deducted
Capital%expenses%are%depreciated%over%time
Free%cash%flow%is%the%cash%flow%generated%by%normal,%continuing%operations
The%amount%of%cash%the%firm%can%distribute%to%security%holders
I.e.%equity%holders,%bondholders,%etc.
Does%not%relate%to%finance%activities
I.e.%borrowing,%issuing%stock,%repaying%debt,%interest%expense,%or%
income
Net%income%=%(Sales%-COGS%-SG&A%-Interest%exp)%*%(1%-taxes)
Not%the%same%as%free%cash%flow
Includes%non-cash%expenses%and%incomes
Includes%non-operating%expenses%and%incomes
Sales:%sales%on%credit%and%revenue%earned%but%not%received
COGS:%expenses%owed%but%not%yet%paid
Include%depreciation%and%amortization
Inventory%expensed%when%sold%not%when%paid
SG&A%(Selling,%general,%and%administrative%costs)
Include%depreciation%and%amortization
§
Expenses%owed%but%not%yet%paid
§
Taxes
Taxes%paid%do%not%equal%tax%expense
§
2%ways%to%calculate%free%cash%flow
Indirect%method
Starts%with%net%income
§
Adjusts%for%non-cash%charges%included%in%net%income
§
Called%bottom-up
§
1.
Direct%method
Begins%with%cash%sales
§
Restates%the%income%statement%to%include%only%cash%charges%and%
operating%cash%flows
§
Called%top-down
§
2.
Both%methods%yield%the%same%free%cash%flow
Indirect%method:%starts%with%net%income%and%makes%appropriate%adjustments
Operational%adjustments
Depreciation%&%other%non-cash%expenses
§
Changes%in%Net%Working%Capital
Not%all%NWC%items%are%operationally%related
NWC%=%current%assets%-current%liabilities
Non-cash%current%assets
®
NIBCL%=%non-interest%bearing%current%liabilities
®
§
Investment%in%new%fixed%assets
§
Financial%adjustments
After-tax%interest%expenses%and%incomes
§
Increases%in%assets%are%cash%outflows%and%decrease%FCF
Using%money%to%buy%an%asset
Or%receivables
Decreases%in%assets%are%cash%inflows%and%increase%FCF
Cash%Flow%Analysis
Wednesday,% February%8,%2017
8:52%AM
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