Finance Chapter 2 Cash Flow
Cash flow to Creditors + Cash flow to Stockholders
=Cash Flow from Assets
Operating Cash Flow -Net Capital Spending -Change in Net Working Capital
=Cash Flow from Assets
Interest Paid -Net New Borrowing
=Cash Flow to Creditors
Dividends Paid -Net New Equity Raised
=Cash Flow to Stockholders
Ending Net Working Capital -Beginn Net Working Capital
=Change in Net Working Capital
Ending Net Fixed Assets -Beginning Net Fixed Assets + Depreciation
=Net Capital Spending
Money spent on Fixed Assets - Money received from sale of Fixed Assets
=Net Capital Spending
Current Long Term Debt -Previous Long Term Debt
=Net New Borrowing
Current Common Stock & Paid in Surplus Account -Previous Common Stock &Paid in Surplus Account
=Net New Equity Raised
Firm generates cash through activities and cash is either paid to creditors or paid out to owners of firm
Cash Flow
The difference between the number of dollars that came in and the number that went out
Cash Flow
Equals the sum of the firm's cash flow to creditors and its cash flow to stockholders
Cash Flow from Assets
Involves operating cash flow, capital spending, and change in net working capital
Cash Flow from Assets
Negative means company raised more money in form of new debt and equity than it paid out for the year
Cash Flow from Assets
Operating cash flow less the amounts invested in fixed assets and net working capital
Cash Flow from Assets
The cash flow identity
Cash Flow from Assets
The total cash flow to creditors and cash flow to stockholders
Cash Flow from Assets
Sometimes called Cash Flow to Bondholders
Cash Flow to Creditors
Represents the net payments to creditors and owners during year
Cash Flows to Creditors and Stockholders
Tells us how much stock the company has sold
Common Stock and Paid in Surplus Account
When Net New Equity is positive
Company issued new stock
When Net New Equity is negative
Company repurchased stock
Refers to cash that the firm is free to distribute to creditors and stockholders because it is not needed for working capital or fixed asset investments
Free Cash Flow
Add depreciation
From Earnings before interest and taxes to get Operating Cash Flow
Subtract Taxes
From Earnings before interest and taxes to get Operating Cash Flow
Accounting's definition of cash flow considers interest paid to be an operating expense, we treat as a financing expense
How the accounting definition differs from the finance definition of operating cash flow
Interest is deducted when net income is computed
How the accounting definition differs from the finance definition of operating cash flow
We do not subtract interest from Income
How the accounting definition differs from the finance definition of operating cash flow
As firm changes its investment in current assets
Its current liabilities will usually change as well
Means that the firm raised more money by borrowing and selling stock than it paid out to creditors and stockholders
Negative Cash Flow
Can be negative if the firm sold off more assets than it purchased
Net Capital Spending
Net Investment in Fixed Assets is another name for it
Net Capital Spending
Refers to the net spending on fixed assets
Net Capital Spending
Purchases of fixed assets less sale of fixed assets
Net Spending on Fixed Assets
Calculate Revenues minus Costs
Operating Cash Flow
Cash generated from a firm's normal business operations
Operating Cash Flow
Do include taxes because they are paid in cash
Operating Cash Flow
Do not include depreciation since it's not a cash outflow
Operating Cash Flow
Do not include interest because it's a financing expense
Operating Cash Flow
Expenses associated with firm's financing of its assets not included
Operating Cash Flow
Net Income is not the same bc depreciation and interest are subtracted out
Operating Cash Flow
Refers to cash flow that results from the firm's day to day activities of producing and selling
Operating Cash Flow
Tells us whether or not a firm's cash inflows from business operations are sufficient to cover its everyday cash outflows
Operating Cash Flow
Cash Flow from Assets
Same as Free Cash Flow
Measured as the change in net working capital over the period being examined
The Change in Net Working Capital
Represents the net increase or decrease in current assets over current liabilities
The Change in Net Working Capital
The amount spent on net working capital
The Change in Net Working Capital
Cash Flow from Assets should equal Cash Flow to Creditors and Stockholders
To verify that the cash flow identity holds