Transcript Chapter 2 Cash Flow Identities Entrepreneur Corporation Balance Sheet December 31, 2009 and December 31, 2010 Assets Liabilities and Owners' Equity20102010 Current assets $2,060.00 $2,466.00 Current liabilities $1,014.00 $1,346.00 Net.

Chapter 2
Cash Flow Identities
1
Entrepreneur Corporation
Balance Sheet
December 31, 2009 and December 31, 2010
Assets
Liabilities and Owners' Equity
2009
2010
2009
2010
Current assets
$2,060.00 $2,466.00
Current liabilities
$1,014.00 $1,346.00
Net fixed assets
6,790.00 7,407.00
Long-term debt
2,889.00 2,976.00
Total Liabilities
3,903.00 4,322.00
Change in Common Stock and Paid-in surplus
527.00
Change in Retained earnings
77.00
Total Owners' Equity
4,947.00 $5,551.00
Total Assets
$8,850.00 $9,873.00
Total Liabilities and Owners' Equity
$8,850.00 $9,873.00
Entreprene
ur
Balance
Sheet
December
31, 2009
Entrepreneur Corporation
Income Statement
For The Year Ended 2010
Sales
Cost of goods sold
Depreciation
Earnings before interest and tax
Interest
Taxable income
Taxes
Net Income
Dividends
Addition to retained earnings
$4,237.00
2,198.00
1,438.00
601.00
287.00
314.00
107.00
$207.00
$130.00
$77.00
2
What Is The Essence Of Each Side?
Asset = Debt + Equity
Use of Cash
Source of Cash
3
Cash Flow
•
•
•
•
Cash in
Cash out
Cash flow ≠ Net Income (Profit or Earnings)
Throughout this textbook and the study of financial
management, cash flow will be fundamental
• Therefore, we will have to be able to derive cash flow
from the information on the balance sheet and the
income statement
• We will look at how cash is generated from utilizing
assets and how it is paid to those that finance the
purchase of the assets
4
How To Determine A Firm’s Cash Flow
From Its Financial Statements
• Cash flow identity:
Cash flow from assets
=
Cash flow to creditors
(bondholders)
+
Cash flow to
stockholders (owners)
More 
5
Cash flow from assets
=
Cash flow to creditors
(bondholders)
+
Cash flow to
stockholders (owners)
Cash flow from assets
=
Operating cash flow
-
Net capital spending
Operating cash flow
=
Earnings before interest
and taxes (EBIT)
+
Depreciation
-
Taxes
Net capital spending
= Ending net fixed assets
-
Beginning net fixed
assets
+
Depreciation
-
Beginning NWC (Beg
CA - Beg CL)
Change in NWC
Cash flow to creditors
(bondholders)
Cash flow to
stockholders (owners)
=
=
=
Ending NWC (End CA End CL)
Interest paid
Net new borrowing (end
long-term debt - beg
LTD)
Dividends paid
Net new equity raised
(end Common stock &
Paid-in surplus - beg CS
& PIS)
-
Change in net working
capital (NWC)
6
Notes On Identities:
• Operating cash flow = Cash flow from day to day
activities
– Don’t include interest payments because that goes to
bondholders (it properly is a financing expense – different
than accountant CFO)
– Add back the noncash expense, depreciation
– Taxes are paid in cash
• Capital spending = net spending on fixed assets
(purchases - sales)
– Add depreciation back because the net amount has it
subtracted out
• Change in NWC
– CA – CL in beginning and ending period, then take the
difference
7
Notes On Identities:
• Net new borrowing = (End long-term debt) – (beg LTD)
• Net new equity raised = (End common stock & Paid-in
surplus) – (end CS & PIS)
• Amounts in calculations can be positive or negative
– A negative cash flow from assets may indicate that a firm is buying
profitable assets!
– A negative amount from change in NWC, could mean that firm is
managing inventory or receivables or payables more efficiently!
– A negative amount to stockholders could mean that the firm issued
an amount of new stock that is more than dividends paid!
• Handout #3 
8
Cash flow from assets
Handout
#3
=
Cash flow to creditors
(bondholders)
=
+
Cash flow to
stockholders (owners)
+
7
Cash flow from assets
=
Operating cash flow
=
-
Net capital spending
-
-
Change in net working
capital (NWC)
-
4
Operating cash flow
=
Earnings before interest
and taxes (EBIT)
+
=
+
= Ending net fixed assets
-
=
-
Depreciation
-
Taxes
-
3
Net capital spending
Beginning net fixed
assets
+
Depreciation
+
2
Change in NWC
=
Ending NWC (End CA End CL)
=
-
Beginning NWC (Beg
CA - Beg CL)
-
1
Cash flow to creditors
(bondholders)
=
Interest paid
-
Net new borrowing (end
long-term debt - beg
LTD)
=
-
=
Net new equity raised
(end Common stock &
Paid-in surplus - beg CS
& PIS)
5
Cash flow to
stockholders (owners)
=
6
Dividends paid
-
9
Cash flow from assets
=
Cash flow to creditors
-197.00
Cash flow from assets
200.00
= Cash flow from operations
-197.00
Cash flow from operations
=
EBIT
=
End NWC
-397.00
Depreciation
Beg net fixed assets
+
Depreciation
1,438.00
Net new borrowing
87.00
-
130.00
107.00
1,046.00
-
Dividends
Taxes
Beg NWC
287.00
=
Change in NWC
74.00
-
6,790.00
-
Interest
200.00
Cash flow to stockholders
-
1,120.00
=
-
1,438.00
7,407.00
=
Net capital spending
2,055.00
+
End net fixed assets
74.00
Cash flow to creditors
-
601.00
2,055.00
Change in NWC
-397.00
1,932.00
1,932.00
Net capital spending
+ Cash flow to stockholders
Net new equity
527.00
10