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1、Cash Flow Statement and Financial Statement Analysis Learning Objectives : Develop an ability to prepare a statement of cash flows using Direct Method and Develop skills to analyze profitability and riskDiscussion Section # 4Financial Reporting - E202Lopo Martinez 1Operation ActivitiesCash Flow from
2、 Operations Cash payments for operationsCash receipts from operationsNet incomeAdjustments for non-cash revenues and expensesAdjustments for receivables, inventories, payables, other current assets/liabilitiesCash flow from operationsLessPlus/LessPlus/LessEqualsEqualsDirect MethodIndirect MethodCan
3、be computed two ways:Obtained from cash receipts journal.Obtained from accrual sales information.Cash received from customers Direct MethodCash Received from Customers= = SalesSales- increase A/R+ decrease A/R+ increase Un. Rev.- decrease Un. Rev= =Sales- D - D A/R+ D + D Un. RevenueCash receivedfro
4、m customersSo to compute Cash Received from Customers : Step 1 Step 2 Purchases = COGS+ Increase in inventory - Decrease in inventoryCash paid for merchandise = Purchases- Increase in A/P + Decrease in A/PDirect MethodCash Paid for Merchandise= =COGS+ D + D INV- D - D A/PCash paid formerchandiseSo t
5、o compute Cash Paid for Merchandise :The cash paid for wages and other operating expenses is affected by(1) whether the expense was accrued (W/P, Rents Payable), and(2) whether the expense was prepaid (Prepaid Wages, Prepaid Rents) Cash paid for wages and other operating expenses =Wages and other op
6、erating expenses - Increase in accrued liabilities + Decrease in accrued liabilities + Increase in prepaid expenses - Decrease in prepaid expensesDirect MethodWages and Operating Expenses= =Wagesand otheroperatingexpenses- D - D W/P+ D + D Pr.WagesCash paid forWages and Other OperatingExpenses- D -
7、D Rent Payable- D - D I Insur.Payable+ D + D Pr.Rent+ D + D Pr.Insur.So to compute Cash Paid to Employees and other Operating Expenses :Cash paid for interest =Interest Expense+ Decreasein Interest payable - Increase in Interest payableCash paid for taxes=Tax Expense + Decrease in taxes payable - In
8、crease in taxes payableDirect MethodCash Paid for Interest and Taxes= =Interest Exp.- - D D Int. PayableCash paid for interestCash paid for taxesTax Exp.= =- - D D Tax. PayableSales- D - D A/R+ D + D Un. RevenueCash receivedfrom customersCOGS+ D + D INV- D - D A/PCash paid formerchandiseWagesand oth
9、eroperatingexpenses- D - D W/P+ D + D Pr.WagesCash paid forWages and Other OperatingExpenses- D - D Rent Payable- D - D I Insur.Payable+ D + D Pr.Rent+ D + D Pr.Insur.Interest Exp.- D - D Int. PayableCash paid for interestCash paid for taxesTax Exp.- D - D Tax. PayableCash fromOperations(Direct Appr
10、oach)+-Sales- D - D A/R+ D + D Un. Revenue- COGS- D - D INV+ D + D A/P- W. And other OE+ D + D W/P- D - D Pr.Wages+ D + D Rent Payable+ D + D I Insur.Payable- D - D Pr.Rent- D - D Pr.Insur.- Interest Exp.+ D + D Int. Payable- Tax Exp.+ D + D Tax. PayableCash fromOperations(Indirect Method)Net Income
11、+ Deprec +Amort +Losses-Gains=-D D Noncash WorkingCapital (WK)=Direct and Indirect Method JAN 1 DEC 31Balance Sheet ChangeCash52,000$ 58,000$ Accounts receivable93,000 106,000 $13,000Inventories151,000 162,000 11,000 Land30,000 30,000 Building and Equip.790,000 830,000 40,000 Acc. Depreciation(460,0
12、00) (504,000) (44,000) Total Assets656,000$ 682,000$ Liabilities and OEAccounts payable136,000$ 141,000$ 5,000 Interest Payable10,000 8,000 (2,000) Mortgage Payable120,000 109,000 (11,000) Common Stocks250,000 250,000 Retained Earning140,000 174,000 34,000 Total Liabilities and OE656,000$ 682,000$ D
13、 DWK = D D Current Assets - D D Current Liabilities21,000 AssetsHALE COMPANYComparative Balance SheetsSales Revenues $1,200,000Expenses Cost of Goods Sold788,000 Wages and Salaries280,000 Depreciation54,000 Interest12,000 Income Taxes22,000 Total1,156,000Net Income $44,000(10,000)Addition to Retaine
14、d Earnings 34,000Retained Earnings , Jan. 1140,000$174,000Dividends on Common StockRetained Earnings , Dec. 31HALE COMPANYIncome Statement and Retained EarningsFor the Current YearDuring the current year a firm sold for $5,000 equipment costing $15,000 with $10,000 of Acc. Depreciation. Did the firm
15、 purchase any equipment ?Purchase of Equip = End. Equip - ( Beg. Equip Sale of Equip)830,000 ( 790,000 15,000) = $ 55,000P- 4.27 Net Income$44,000Additions Depreciation Exp.54,000 Increase in A/P5,000Subtractions Increase in A/R(13,000) Increase in Inv.(11,000) Decrease in Int. Payable(2,000)Cash Fl
16、ow from Operations$77,000 Sale of Equipment$5,000 Acquisition of Equip.(55,000)Cash Flow from Investing(50,000) Dividends(10,000) Retirement of Mortg/P(11,000)Cash Flow from Financing(21,000)Net Change in Cash 6,000Cash, January 152,000Cash, December 31$58,000HALE COMPANYStatement of Cash FlowsOpera
17、tions :Investing :Financing :For the Current YearJAN 1 DEC 31Balance Sheet ChangeCashAccounts receivable$13,000Inventories11,000 LandBuilding and Equip.40,000 Acc. Depreciation(44,000) Total AssetsLiabilities and OEAccounts payable5,000 Interest Payable(2,000) Mortgage Payable(11,000) Common StocksR
18、etained Earning34,000 Total Liabilities and OE D DWK 21,000 AssetsHALE COMPANYComparative Balance SheetsSales Revenues $1,200,000Expenses Cost of Goods Sold788,000 Wages and Salaries280,000 Depreciation54,000 Interest12,000 Income Taxes22,000 Total1,156,000Net Income $44,000(10,000)Addition to Retai
19、ned Earnings 34,000Retained Earnings , Jan. 1140,000$174,000Dividends on Common StockRetained Earnings , Dec. 31HALE COMPANYIncome Statement and Retained EarningsFor the Current YearP- 4.27 a) Sales- D - D A/R+ D + D Un. RevenueCash receivedfrom customers=1,200,000- (13,000)1,187,000COGS+ D + D INV-
20、 D - D A/PCash paid toSuppliers=794,000788,000+ (11,000)- (5,000) Interest Exp.- D - D Int. PayableCash paid for interest=14,00012,000- (-2,000)Wagesexpenses- D - D W/P+ D + D Pr.WagesCash paid forWages=280,000280,000Cash paid for taxesTax Exp.- D - D Tax. Payable=22,00022,000- D - D WK Cash from Op
21、erations=77,000Sales Expensescash - (21,000)98,000Cash from Customer$1,187,000Cash to Suppliers(794,000)Cash to Employees (280,000)Cash for Interests(14,000)Cash for Taxes(22,000) Cash Flow from Operations$77,000HALE COMPANYStatement of Cash FlowsOperations :For the Current YearP- 4.27 b) c) d) 10Pr
22、ofitability RatiosRate of returnon assetsLevel 1Rate of return tocreditors andpreferred shareholdersRate of return oncommon shareholdersequityProfitmarginfor ROALevel 2Total assetsturnover ratio=+LeverageratioTotal assetsturnover ratioProfit margin forROCEVariousexpense-to-salespercentagesLevel 3A.R
23、. turnover,inv. turnover,plant assetturnoverA.R. turnover,inv. turnover,plant assetturnoverVariousexpense-to-salespercentagesReturn on Assets (ROA)ROA presents profitability independent of the source of financingDoes not consider leverageMeasure of how well the firm uses its assets to generate incom
24、eDisaggregating ROA - ROA can be defined as the product of two other ratios1. Profit margin ratio, and2. Total assets turnoverAccounts Receivable TurnoverInventory TurnoverFixed Asset TurnoverTurnover RatiosReturn on Common Equity ROCE can be disaggregated into three related ratios1. Profit margin r
25、atio for ROCE2. Total assets turnover3. Leverage ratioLeverage ratio indicates the relative proportion of capital provided by common shareholders as distinct from that provided by creditors (debtors) or preferred shareholders.Earnings Per ShareEPS does not consider the amount of assets or capital re
26、quired to generate earnings.Measures of Short-Term Risk Current ratio:current ratio = (current assets)/(current liabilities) Quick ratio:(current highly liquid assets)/(current liabilities) Cash flow from operations to current liabilities ratio:(cash flow from operations)/(current liabilities)Measures of Long-Term Risk Debt-to-equity ratio:total equities = total liab. + shareholders equity Cash from operations to total liabilities ratio: Measures the ability of the firm to pay all liabilities from cash without new debt or additional investment. Interest coverage ratio =