Module 6 Statement of Cash Flows

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Module 6Statement of Cash Flows
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Motorola and Blockbuster
Motorola (in millions) 2000 1999 1998
Net earnings (loss) 1,318 891 (907)
Net cash flow from ops (1,164) 2,140 1,295
Blockbuster (in millions) 2000 1999 1998
Net loss (75.9) (69.2) (336.6)
Net cash flow from ops 1,320.8 1,142.8 1,234.5
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History

• Statement of Sources and Uses of Funds
• Funds Statement
• Statement of Changes in Financial Position
• SFAS 95 Statement of Cash Flows effective for
  annual financial statements for FY ending after
  7/15/88

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Overview of SCF

• One of the major financial statements
• Purpose is to provide information about cash
  inflows and outflows
• Explains the changes in cash
• What is cash and cash equivalents??
• Cash
• Short term investments in T-bills, commercial
  paper and money market funds

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Three classifications of cash flow activity

• Operating
• Investing
• Financing

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Operating Activities

• Cash inflows from
• Sales of goods or services
• Interest
• Dividends
• Sale of trading securities
• Cash outflows from
• Merchandise inventory
• Salaries
• Interest expense
• Purchase of trading securities

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Investing Activities

• Cash inflows from
• Sales of property, plant and equip
• Sale of available for sale and held-to-maturity
  securities
• Collection of money loaned to others
• Cash outflows for
• Purchase of property, plant and equipment
• Purchase of securities above
• Making loans to others

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Financing Activities

• Cash inflows from
• Capital stock
• Debt (loans, bonds, notes)
• Cash outflows for
• Buying back corporate stock (Treasury stock)
• Paying the principal portion of debt
• Paying cash dividends to shareholders

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Tips for categorizing

• Look at companys perspective, not the type of
  account involved.
• Example dividends
• Example loans
• Example common stock

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Users of SCF Info

• Management
• Stockholders
• Creditors
• FASB prohibits companies from disclosing cash
  flow per share

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Presentation Method

• Direct v. indirect
• Difference lies in operating section
• Direct method
• Recommended by FASB
• Shows classes of gross receipts and disbursements
• Indirect method
• Starts with net income (accrual basis) and
  adjusts to a cash basis income
• Used by more companies

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Operating Income v. Cash Flows
Company 1995 (in 000s) 1996 (in 000s) 1997 (in 000s)
Alaska Airlines Inc fm Ops CF - Op 24,800 104,400 45,600 203,000 76,000 323,200
Boeing Inc fm Ops CF - Op -36,000 2,135,000 1,818,000 3,611,000 -178000 2,100,000
Office Max Inc fm Ops CF - Op 125,763 -38,722 68,805 -24,313 89,620 -90,031
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How do I use the information?

• Adjusted Cash Flow to Income Ratio
• Disclosure operating income
• Cash inflows primarily coming from asset sales,
  borrowing or equity offerings
• Computer adjusted cash flow and income from
  continuing operations
• Cash flow ambiguities
• Motley Fools view

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Enron
(in millions) 2000 1999 1998
Net income 979 893 703
Net cash provided by operating activities 4,779 1,228 1,640
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Caution Flags

• Failure to generate cash from operating
  activities
• Large fluctuations in cash flow from operating
  activities over time
• Net income and cash flow from operations not
  tracking closely
• Net income and cash flow from operations moving
  in different directions
• Positive cash flow from investing activities
  because company is selling off assets to generate
  cash

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Caution Flags

• Positive cash flow from financing activities for
  several periods 0 possibly indicating borrowing
  needed to offset lack of internet cash generation
• Company highlights cash flow in shareholders
  letter, especially in same paragraph discussing
  falling stock price
• Adjustments to net income from changes in
  receivables, inventories, and payables not in
  line with sales
• Managements explanation of adjustments to net
  income obtuse or missing