Statement of Cash Flows
CENTRAL FACT
Over long enough periods:
NI
= Cash from Ops. + Cash from Inv.
= Free Cash Flows
• The difference is timing
• The goal of SCF is to explain the difference
Why do we care about cash?
• Information on:
– Liquidity
– “Quality” of earnings
– “Free cash flows” for valuation
• Problem:
– interpretation is difficult and context specific
– depends on the life-cycle of the company
– it is hard to know what is a good cash flow
Fundamental Relations
Assets = Liabilities + Owners’ Equity
Cash = Liabilities + OE - Noncash Assets
Cash = Liab. + OE - Noncash Assets
Cash = NI + Liab. + CC - Div. - NCA
Formats
• Two formats for the operation section
• Financing and investing are always the
same
Miscellaneous Cash Flow Stuff
• Why don’t lines on SCF tie to changes on B/S?
• Foreign currency translation
– subsidiaries are generally accounted for in local
currency
– in consolidation local currency is converted to dollars
– changes in accounting balances that result from changes
in currency are handled as a separate line item on SCF
– changes in shareholders’ equity go to “other equity” on
the balance sheet
Example
• Foreign sub with the following ‘96 and ‘97 ¥ B/S
and the ¥ weakening from ¥100/$ to ¥111/$.
‘96 & ‘97
‘96
‘97
Cash
¥100
$1.0 $0.9
Inventory
¥200
$2.0 $1.8
Equity (100% owned)
¥300
$3.0 $2.7
• B/S--change in equity ($0.3) is “foreign currency
translation adjustment” in shareholders’ equity
• SCF--the change in cash ($0.1) is separate line item (not
spread across change in inventory, etc)
Acquisition Accounting
• You buy a company with identifiable assets with a
book value of $100 (fair value of $200) for $250.
Identifiable Assets
Goodwill
Cash
$200
$50
$250
Goodwill will appear as an intangible asset
On the SCF, the only effect will be $250 as an investing
use of cash, even though lots of other accounts change
Major Noncash Transactions
• Transactions not involving cash are not
reported on the face of the statement
– e.g., purchase PP&E for debt, acquire other
companies for stock, swap assets
• Disclosure is required
– typically at the bottom of the SCF
Other Items
• Firms must disclose interest and taxes paid
–
–
–
–
income statement gives “accrual” amounts
cash interest & taxes are used in some analysis
generally disclosed at the bottom of SCF
sometimes disclosed in notes (e.g., Coke)