Chapter 7--Learning Objectives.ppt

Chapter 7--Learning Objectives 1. Understand how the statement of cash flows assists users in evaluation of firm performance Current operating cash flowsa major user need Current operating cash flows (COCF) is cash available from normal operations Current operating cash flowsmust be adequate for: 1. Permanent working capital 2. Seasonal working capital 3. Net fixed (and other long-term) assets 4. Repayment of debt principal interest 5. Payment of dividends Permanent working capital a firm’s permanent investment in net operating asset receivables and inventory less the amount of this investment financed by trade creditors through accounts payable Seasonal working capital increases in inventory levels required by seasonally increased demands for the firm’s product or service Adequacy ratios The following ratios help assess the adequacy of COCF to meet firm needs: Capital acquisition ratio Debt coverage ratio Dividend coverage ratio Cash flow adequacy ratio Adequacy ratios (cont.) Capital Financing Reinvestment Cash-Interest Coverage Dividend Payout Performance and quality ratios Cash flow return on assets Cash flow return on common equity Quality of sales ratio Quality of income ratio (2) Cash flow per share Cash flow return on assets COCF before interest and taxes * Average total assets * inclusion of taxes varies in practice Cash flow return on common equity COCF - preferred dividends Average common equity Quality of sales ratio Cash from sales Sales Quality of income ratio # 1 Current operating cash flows Operating income Quality of income ratio # 2 C O C F before interest and taxes Income before interest, taxes deprec. Cash flow per share* C O C F - preferred dividends Average number of common shares *explicitly prohibited from disclosure in annual report Chapter 7--Learning Objectives 2. Interpret the format and content of the statement of cash flows Statement of cash flows The purpose of the cash flow statement is to show the sources