FINANCIAL REPORTING AND ANALYSIS

Overview, Techniques, Ratios and Limitations

Carlos B. Steinblock · [email protected]

Financial Reporting & Analysis

Recap

● The Income Statement ○ Net Sales · CoGS · Gross Profit ○ Operating Expense · Operating Profit ○ Other Income (Expense) · Equity Earnings ○ EBIT & Effective Tax Rate ○ Special Items · Net Earnings · EPS ·

Comprehensive Income

Agenda

● The Cash Flow Statement ○ ‘Cash is King’ ○ Basic Principles - classification ○ Direct vs Indirect Method ○ Calculating CF · some examples ○ Analyzing CF

Cash Flow Statement

● reports the cash generated and spent during a specific period of time (e.g., a month, quarter, or year). The statement of cash flows acts as a bridge between the income statement and balance sheet by showing how money moved in and out of the business.

...https://corporatefinanceinstitute.com/resources/knowledge/accounting/statement-of-cash-flows/

Cash is King

Purposes of the CF Statement The statement of cash flows assists investors, creditors, and others in assessing such factors as:

● The company’s ability to generate positive cash flows in future periods ● The company’s ability to meet its obligations and to pay dividends ● The company’s need for external financing ● Reasons for differences between the amount of net income and the related net cash

flows from operating activities ● Both the cash and noncash aspects of the company’s investment and financing

transactions for the period ● Causes of the change in the amount of cash and cash equivalents between the

beginning and the end of the accounting period.

Basic Principle

The statement of cash flows is, in reality, another way of presenting the balance sheet of a company; except in the case of a balance sheet, which shows amounts at the end of the accounting period, the statement of cash flows shows the changes in the balance sheet accounts between periods.

Basic Principle

The change in cash between periods is explained by the changes in all the other balance sheet accounts, and each balance sheet account is related either to an operating activity (e.g., accounts receivable, inventory, accounts payable, net income in the retained earnings account), an investing activity (e.g., purchase or sale of property, plant, and equipment), or a financing activity (e.g., borrowing and repaying debt).

CF from operating activities

CF from investing activities

CF from financing activities

CF Statement

Exercise

Exercise

Exercise

Direct vs Indirect Method

Firms may use one of two methods prescribed by the Financial Accounting Standards Board (FASB) for calculating and presenting cash flow from operating activities: the direct method and the indirect method. The direct method shows cash collections from customers, interest and dividends collected, other operating cash receipts, cash paid to suppliers and employees, interest paid, taxes paid, and other operating cash payments. The indirect method starts with net income and adjusts for deferrals; accruals; noncash items, such as depreciation and amortization; and nonoperating items, such as gains and losses on asset sales.

Direct vs Indirect Method

According to Accounting Trends and Techniques, 495 firms out of 500 used the indirect method in 2010.

The indirect Method

The indirect Method · the SAGE example

Cash Flow Quality & Analysis

Which company is in the stronger cash flow position?

Exercise

EBITDA, CF, FCF, FCFE & FCFF

HP Inc.

HP Inc.

Let’s do some Analysis

Let’s do some Analysis

Let’s do some Analysis

Exercise

Exercise