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Lecture Financial statement analysis (11/e): Chapter 7 - K. R. Subramanyam

Chapter 7 - Cash flow analysis. In this chapter we analyze cash flow measures for insights into all business activities, with special emphasis on operations. Attention is directed at company and business conditions when interpreting cash flows. We also consider alternative measures of cash flows. | Financial Statement Analysis K.R. Subramanyam Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 07 CHAPTER Cash Flow Analysis Statement of Cash Flows Cash is the most liquid of assets. Offers both liquidity and flexibility. Both the beginning and the end of a company’s operating cycle. Contrast: Accrual accounting and Cash basis accounting. Net cash flow as the end measure of profitability. Cash flow analysis helps in assessing liquidity, solvency, and financial flexibility. Relevance of Cash Statement of Cash Flows Statement of cash flows (SCF) helps address questions such as: How much cash is generated from or used in operations? What expenditures are made with cash from operations? How are dividends paid when confronting an operating loss? What is the source of cash for debt payments? How is the increase in investments financed? What is the source of cash for new plant assets? Why is cash lower when income increased? What is the use of cash received from new financing? Relevance of Cash Statement of Cash Flows The SCF reports cash receipts and cash payments by operating, financing, and investing activities: Operating activities are the earning-related activities of a company. Reporting by Activities Beyond revenue and expense activities represented in an income statement, they include the net inflows and outflows of cash resulting from related operating activities like extending credit to customers, investing in inventories, and obtaining credit from suppliers. Statement of Cash Flows Investing activities are means of acquiring and disposing of noncash assets. Involve assets expected to generate income; lending funds and collecting the principal on these loans. Financing activities are means of contributing, withdrawing, and servicing funds to support business activities. Include borrowing and repaying funds with bonds and other loans; . | Financial Statement Analysis K.R. Subramanyam Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 07 CHAPTER Cash Flow Analysis Statement of Cash Flows Cash is the most liquid of assets. Offers both liquidity and flexibility. Both the beginning and the end of a company’s operating cycle. Contrast: Accrual accounting and Cash basis accounting. Net cash flow as the end measure of profitability. Cash flow analysis helps in assessing liquidity, solvency, and financial flexibility. Relevance of Cash Statement of Cash Flows Statement of cash flows (SCF) helps address questions such as: How much cash is generated from or used in operations? What expenditures are made with cash from operations? How are dividends paid when confronting an operating loss? What is the source of cash for debt payments? How is the increase in investments financed? What is the source of cash for new plant