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