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Discuss why free cash flow (FCF) is important in financial analysis and how an analyst can use the financial statements a company produces to compute FCF. Starting with a simplified version of an income statement discuss how we can derive FCF from net income and provide three examples of adjustments which need to be made to derive CFC from net income.

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Collen Von
Collen VonLv2
28 Sep 2019

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The financial statement for urban outfitters for the fiscal year ending Jan 2012 can be found on google

CP12-2 Finding Financial Information LO12-2, 12-4, 12-6
Refer to the financial statements of Urban Outfitters given in Appendix C at the end of this book.
Required:
1. Does Urban Outfitters use the direct or indirect method to report cash flows from operating activities?
2. What amount of tax payments did the company make during the most recent reporting year?
(Hint: The statement of cash flows may be helpful to answer this question.)
3. Explain why the “share-based compensation” and “depreciation and amortization” items were added in
the reconciliation of net income to net cash provided by operating activities.
4. Has the company paid cash dividends during the last three years?
How do you know?
5. What was free cash flow for the year ended January 31, 2012? (Dollars in thousands.)
Cash Flows from
Free Cash Flow:

The Statement of Cash flows have become one of the most important financial documents. It is possible to a huge net loss while still generating significant positive cash flows (using depreciation as an example). It is even possible to have billions of dollars in net losses with no effect on the cash position by merely writing off a single item (such as goodwill). It is possible to have a rapidly growing profitable business and become insolvent because one did not manage their cash flow. As it can be seen, the statement of cash flows is extremely important in helping the analyst determine what is happening with corporate finances.

The Statement of cash flows is broken down into three major parts: cash flow from operating activities, cash flow from financing activities and cash flow from investing activities. By carefully studying these documents you can determine the source and use of corporate funds.

Corporations have numerous methods of “manipulating” their books. Some methods are legal some methods are not legal. Based upon your reading in the book, your research on the internet and previous classes please discuss the methods you, as a financial manager could improve gross profit, operating profit and net profit margins.

The class should discuss all of the questions listed below as they relate to the financial statements of any U.S. public company of your choice in its latest annual report. You can find the financial statements of any U.S. public company by visiting Morningstar, Yahoo Finance or MSN Money, and using the stock market symbol for your chosen company (which can be looked up on Morningstar, Yahoo Finance or MSN Money). If you work for a U.S. public company, you probably want to use the financial statements of your company - but the choice is up to you.

NOTE: Sometimes Yahoo, MSN Money and Morningstar omit numbers. Only the annual report from the company web site or the SEC form 10-K (for U S Companies) can be guaranteed to have all numbers correct. The 10-K Business section and Management Discussion and Analysis contain valuable information about the business, competitors and what happened to financial results. It can be found on the SEC web site: www.sec.gov. Click on Edgar and then enter the ticker symbol for the company. Search for 10-K.

It is useful to compare financial ratios for a company with financial ratios of its industry. Industry financial ratios can be found on Morningstar.com, Yahoo Finance and MSN Money.

Please answer the following questions:

1) What 3 items of important information does the income statement reveal about the financial performance of the company over the last three years?

2) What 3 items of important information does the balance sheet reveal about the financial position of the company over the last two years?

3) Can you identify the major sources of funding used by the company from the information presented in the company's Cash Flow Statement?

If not, how could you get this information?

4) Who is responsible for: a) the issuance, and b) the content of the company financial statements?

5) What assurance, if any, is there that the financial statements are in compliance with GAAP, and are free of material misstatements?

6) Of what use, if any, are the notes to the financial statements? Give 2 facts learned from reading footnotes.

7) What can you learn from the Business Section of the 10-K? Give two facts about the company that you picked from the Business Section.

8) What can you learn from the Management's Discussion and Analysis of Financial Condition and Results of Operations in the 10-K? Give two facts about the company from this section.

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