Reading: The Cash Flow Statement
A solid financial plan is the basis of every valuation exercise and every significant management decision. The financial plan allows us to identify the firm's capital needs as well as its ability to generate cash. It also unveils the various sources and uses of funds. This section shows how to set up a financial plan.
1. The Cash Flow Statement
1.5. Summary
The preceding sections have shown the relevant steps that bring us from the firm's balance sheets and income statement to its cash flow statement.
On this journey, we have made sure that we isolate operating, investment, and financing activities and that we distinguish between accounting earnings and real cash flows. With the necessary adjustments, we have compiled the firm's cash flow statement, which provides detailed information about the sources and uses of cash during a specific accounting period.
The following table summarizes the individual steps and provides the full cash flow statement of firm X for year 1:
|
Cash flow statement |
Year 1 |
|
Net income |
2'800 |
|
+ After-tax interest expenses |
400 |
|
NOPLAT |
3'200 |
|
+ Depreciation and amortization |
3000 |
|
- Increase in operating assets |
300 |
|
+ Increase in operating liabilities |
600 |
|
Operating cash flow |
6'500 |
|
- Net investments |
3'500 |
|
Free cash flow |
3'000 |
|
- After-tax interest expenses |
400 |
|
- Repayment of debt |
1'000 |
|
Residual cash flow |
1'600 |
|
+ Equity offerings |
0 |
|
- Dividends |
1'400 |
|
Change in (excess) cash |
200 |
By now, we are able to derive a full cash flow statement based on the information provided by the balance sheets and income statement. With this knowledge, we are able to take the next step and address the issue of financial projections. Before doing so, the next section will review potential extensions of the analysis and address some frequently asked questions.