Intro to Finance: Financial Statement Analysis - Statement of Cash, Flows Operating Investing Financing Cash Flows

What This Is

The Statement of Cash Flows (SCF) is a financial statement that reports a company's inflows and outflows of cash and cash equivalents over a specific period. It's essential for understanding a company's liquidity, solvency, and ability to generate cash to meet its obligations. For example, let's consider Apple Inc. (AAPL) with $200 billion in cash and cash equivalents at the end of 2022. The SCF helps investors and analysts assess Apple's ability to invest in growth opportunities, pay dividends, and manage its cash position.

Key Formulas & Symbols

• Operating Cash Flow (OCF) = Net Income + Depreciation + Amortization + Change in Working Capital where:
• OCF = Operating Cash Flow
• Net Income = Net income from the income statement
• Depreciation = Depreciation expense from the income statement
• Amortization = Amortization expense from the income statement
• Change in Working Capital = (Accounts Receivable + Inventory - Accounts Payable) - Previous Period's Working Capital
• Investing Cash Flow (ICF) = Capital Expenditures - Proceeds from Sale of Assets where:
• ICF = Investing Cash Flow
• Capital Expenditures = Property, Plant, and Equipment (PP&E) additions
• Proceeds from Sale of Assets = Proceeds from sale of PP&E, investments, etc.
• Financing Cash Flow (FCF) = Net Borrowing - Dividends Paid where:
• FCF = Financing Cash Flow
• Net Borrowing = (New Debt Issuance - Debt Repayment) - (New Equity Issuance - Equity Repurchase)
• Dividends Paid = Dividends paid to shareholders
• Free Cash Flow (FCF) = OCF - Capital Expenditures where:
• FCF = Free Cash Flow
• OCF = Operating Cash Flow
• Capital Expenditures = Property, Plant, and Equipment (PP&E) additions
• Cash Conversion Cycle (CCC) = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding where:
• CCC = Cash Conversion Cycle
• Days Inventory Outstanding = Average Inventory / (Cost of Goods Sold / 365)
• Days Sales Outstanding = Average Accounts Receivable / (Sales / 365)
• Days Payable Outstanding = Average Accounts Payable / (Cost of Goods Sold / 365)

Step-by-Step Calculation

1. Calculate Operating Cash Flow (OCF):
2. Start with net income from the income statement
3. Add depreciation and amortization expenses
4. Calculate the change in working capital (accounts receivable, inventory, and accounts payable)

5. Add the change in working capital to the net income

6. Calculate Investing Cash Flow (ICF):

7. Start with capital expenditures (PP&E additions)

8. Subtract proceeds from the sale of assets (PP&E, investments, etc.)

9. Calculate Financing Cash Flow (FCF):

10. Start with net borrowing (new debt issuance - debt repayment - new equity issuance + equity repurchase)

11. Subtract dividends paid to shareholders

12. Calculate Free Cash Flow (FCF):

13. Start with operating cash flow (OCF)
14. Subtract capital expenditures (PP&E additions)

Common Mistakes

• Mistake: Confusing Operating Cash Flow (OCF) with Free Cash Flow (FCF).
• Correction: OCF includes depreciation and amortization, while FCF excludes capital expenditures.
• Mistake: Failing to consider the change in working capital when calculating OCF.
• Correction: The change in working capital is a critical component of OCF, as it affects a company's liquidity and ability to meet its obligations.
• Mistake: Using the wrong formula for Cash Conversion Cycle (CCC).
• Correction: The correct formula for CCC is Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding.

Exam / CFA Tips

• Tip: Be prepared to calculate OCF, ICF, FCF, and CCC from a given income statement and balance sheet.
• Tip: Understand the differences between OCF and FCF, and how they are used in different contexts.
• Tip: Be aware of the common mistakes and pitfalls when calculating cash flows.

Quick Practice Problem

Problem: Calculate the Free Cash Flow (FCF) for Apple Inc. (AAPL) using the following data: - Net Income: $100 billion - Depreciation: $20 billion - Amortization: $5 billion - Capital Expenditures: $30 billion - Change in Working Capital: $10 billion

Answer: FCF = OCF - Capital Expenditures = ($100 billion + $20 billion + $5 billion + $10 billion) - $30 billion = $105 billion

Last-Minute Cram Sheet

• The Statement of Cash Flows (SCF) is a critical component of a company's financial statements.
• Operating Cash Flow (OCF) = Net Income + Depreciation + Amortization + Change in Working Capital.
• Investing Cash Flow (ICF) = Capital Expenditures - Proceeds from Sale of Assets.
• Financing Cash Flow (FCF) = Net Borrowing - Dividends Paid.
• Free Cash Flow (FCF) = OCF - Capital Expenditures.
• Cash Conversion Cycle (CCC) = Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding.
• OCF includes depreciation and amortization, while FCF excludes capital expenditures.
• The change in working capital is a critical component of OCF.
• Be prepared to calculate OCF, ICF, FCF, and CCC from a given income statement and balance sheet.