unlocking financial statements (2012) - day 4 by jimmy gentry

UnlockingFinancial Statements

Day 4

Schedule for Week Day 1: Introduction to financial

statements Day 2: Income statement Day 3: Balance sheet Day 4: Cash flows Day 5: Beyond the basics

Understanding Financial Statements2

Understanding Financial Statements3

Statement of Cash Flows

Understanding Financial Statements4

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 Statements5

Statement of Cash Flows Record of cash provided by cash

sources and of cash consumed by cash uses.

Understanding Financial Statements6

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 Statements7

Cash Flows From operations From investing From financing

Understanding Financial Statements8

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 Statements9

Understanding Financial Statements10

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 Statements11

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 Statements12

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 Statements13

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

in the 10-K

Understanding Financial Statements14

Presented by:

James K. Gentry, Ph.D. Clyde M. Reed Teaching Professor School of Journalism and Mass Communications University of Kansas jgentry@ku.edu

Understanding Financial Statements15