unlocking financial statements - day 4

Online SeminarDay 4

July 22, 2010

Unlocking Financial Statements

Statement of Cash Flows

Understanding Financial Statements2

Understanding Financial Statements3

Accrual Method Records revenues as soon as the “sale”

occurs Records expenses as soon as the bill is

received IE, transactions enter the financial

records when they occur, not when cash changes hands

Accrual method, therefore, shows “scores,” not real spendable dollars

Understanding Financial Statements4

Statement of Cash Flows Record of cash provided by cash

sources and of cash consumed by cash uses.

Understanding Financial Statements5

Cash Flows (cont.) Information about use of cash Information about investing and financing Ability to continue as a going concern Ability to generate future positive cash

flows Ability to meet obligations and pay

dividends

Understanding Financial Statements6

Cash Flows From operations From investing From financing

Understanding Financial Statements7

Flexibility Companies have some flexibility in

categories for entries. Total change in cash, however, will not

change. Overwhelming majority of all accounting

standards deal with balance sheet and income statement, not cash flows statement.

Cash and Cash Equivalents The category Cash and Cash

Equivalents shows how much “cash” the company had at the start or end of a period.

Note the changes in this category.

Understanding Financial Statements8

Understanding Financial Statements9

Free Cash Powerful tool for making a company

successful Powerful indicator for investors Cash that is left over after productive

capacity is maintained or expanded Permits expansion, paying down debt,

buying back shares, etc.

Understanding Financial Statements10

Free Cash Several ways to calculate it Companies create their own models Gross way to do it:

Cash from operating activities Minus capital expenditures Equals free cash flow

Understanding Financial Statements11

American Standard Model

Cash from operating activities Minus capital expenditures Plus proceeds from disposal of property Plus proceeds from sale and

leasebacks Equals free cash flow

VF Model Cash from operating Minus cash used in investing

Understanding Financial Statements12

Finding Company’s Formula Often requires you to do some digging

in the 10-K

Understanding Financial Statements13