Domina las habilidades técnicas necesarias para analizar estados financieros y declaraciones. Después podrás aplicar estas habilidades a un reto empresarial del mundo real como parte de la Programa Especializado de Fundamentos Empresariales de Wharton.
3.2.2: Caso Relic Spotters, Parte 6
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Introducción a la Contabilidad Financiera
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Semana 3: Flujos de Efectivo
¡El efectivo es el Rey! Comenzaremos con la clasificación de los flujos de efectivo divididos en operaciones, inversión y actividades financieras. Luego, trabajaremos en preparar y analizar los Estados de flujo de efectivo. Abarcaremos el caso de la nueva compañía preparando y analizando sus estados de flujo de efectivo. Finalmente, discutiremos las diferencias entre Ganancias, Efectivo de Operaciones, EBITDA y Flujo de efectivo libre.
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Brian J BusheeThe Geoffrey T. Boisi Professor
Accounting
Hello, I'm Professor Brian Bushee.
Welcome back.
In this video, we're finally going to finish the Relic Spotter case by putting
together it's statement of cash flows using the direct and indirect methods.
Let's get started.
Last time we looked at the Relic Spotter case, we put all of
the cash transactions into operating, investing and financing buckets.
So now we're going to go ahead and
use these classifications to put together the cash flow statement.
To do the indirect method,
we're going to need to pull some information off the income statement.
So here's a reminder of what the income statement looked like for Relic Spotter.
And we're going to need to use the balance sheet, so
here's what the balance sheet look like for Relic Spotter.
>> Where did all of the zeros come from?
I don't remember all of those zeros when we put together the balance sheet.
>> Good memory.
In fact, when we put together the Relic Spotter balance sheet, we didn't have all
these zeros in there because we only put together the ending balance sheet.
But when we do a cash flow statement, we need the change in the balances.
The difference between the beginning balance and the ending balance.
There was no beginning balance on any of these accounts because Relic Spotter is
a start up company.
So I went ahead and created a beginning balance sheet of all zeroes to make it
clear that we're taking the change in the balances for this statement of cash flows,
not just the ending balance.
First, I'm going to do the direct method for investing and financing activities.
Once we get that out of the way,
then we'll look at operating activities under both the direct and indirect method.
For the investing activities,
we need to pull out the column of cash flows that we classified as investing, and
then just list them in the cash flow for investing activity section.
So we have purchase of land for $103,000.
Purchase of buildings $85,000.
We purchase metal detectors of $120,000 cash.
And purchase the software which is a long term asset $21,000.
Add them all up, we get net cash outflow from investing activities of $310,000.
This section will go on the final cash flow statement.
>> How do you determine which line items to report on the statement?
Oftentimes, don't companies simply report a line called capital expenditures?
>> There are generally no specific rules that govern how much or
how little detail you break things into on the statement of cash flows.
It's the manager's choice, but usually the manager makes the choice based on
what investors and analysts want to see.
Because if investors and analysts are looking for
pieces of information that's not there, they'll just ask the company about it
during a conference call or some other communication.
So what you're seeing on the cash flow statement is a joint
agreement between managers and the users of the financial statement as to how
much detail they want to see in these various line items about the company.
Next, we do the direct method for the financing activities, so
here is the column of cash transactions that we classified as financing.
Now we just need to list them, so we pay dividends of $2,500,
proceeds of sale of stock that was $250,000 coming in, and
proceeds from the mortgage payable was $124,000 coming in.
That gives us a net cash inflow for financing activities of $371,500.
And this section will go on the final cash flow statement.
Now even though it's somewhat theoretical,
because companies never really report these,
we're going to look at the operating activities under the direct method.
So let me pull in the operating cash flow transactions.
And under the direct method, all we have to do is list them.
So first, I'm going to take all the cash that we collected from customers.
We received cash on the rental prepayment from the Penn Antiquities Club.
The revenues that came in cash from metal detector rentals.
And then the 35,000 of cash from the sundries sales.
You add that together and you have cash collected from customers totaling 156,300.
>> Wait, we haven't recognized revenue yet on the rental pre-payment amount.
How can we justify putting that on the cash flow statement?
>> Well, we can justify putting it on the cash flow statement because Relic Spotter
actually received cash.
But you raise a good point in that a lot of the examples we've seen so
far, company's are recording revenue before they receive the cash, and so
we have a change in accounts receivable.
But you could have a company receive the cash before they earn the revenue.
The cash flow statement is just giving you cash in and cash out during the period,
and that's going to be different from revenue, but
it could be different in either direction.
Either you might get the cash first,
or you might get the cash later compared to when you book the revenue.
Continuing on, we paid $2,000 cash to our supplier and
we bought an additional 38,000 of inventory with cash.
Add that up, cash paid to suppliers is 40,000.
Cash paid to employees for salaries and wages was 82,000.
Cash paid for short term loans was 5,000.
And then I'll combine legal fees and advertising into cash paid for
miscellaneous expenses of 11,900.
Again, whether you list those separately or combine them depends on what
your financial statement users want to see in terms of the level of detail.
We add all this up and we get net cash from operations of 17,400,
which is what we had in the operating bucket to begin with.
>> Okay, this direct method is simple, clear, straight-forward, and informative.
But, you said that companies rarely use it, so?
>> So, why do we have to learn the indirect method?
Why do companies prefer the indirect method, and
why does the FASB require it even when the direct method is chosen?
>> Yes, that is what I was going to ask.
Let's hear your answer!
>> I'm glad you asked that question here because this is the best place for
me to show you why the direct method is not that useful for
the operating section of the cash flow statement.
Let me jump out to the slide to show you what I mean.
So Relic Spotters cash collected from customers was 156,300.
Is that good or bad?
Relic Spotter's cash paid to suppliers was 40,000.
Is that good or bad?
Well, you can't tell without some kind of benchmark.
You could look at prior year numbers to see if there's a trend, but
what we really want to know is what was the level of activity surrounding these
cash collections during the year?
For example, if Relic Spotter had 157,000 of revenue and
collected 156,300 in cash, then the cash flow makes sense.
But if Relic Spotter had 500,000 in revenue, but
only collected 156,300, then there may be a problem.
Or let's say that Relic Spotter sold 40,000 of inventory,
paid 40,000 to their suppliers.
Again, the cash flow makes sense, but
what if Relic Spotter only sold 10,000 of inventory?
Then the question is,
why did they spend an extra 30,000 in cash to acquire inventory they didn't sell?
What the indirect method's going to do is start with net income as a benchmark for
the expected level of activity or expected level of cash flows during the period, and
then highlight any discrepancies from that level.
This is the kind of thing we'll talk about when we do an analysis of an indirect cash
flow statement after we've finally put one together later in the video.
Now we're going to do the indirect method which will be what will show on the final
cash flow statement for Relic Spotter.
We're going to go step by step following the algorithm that I did before.
Starting with net income.
So I pulled up the income statement at the bottom line,
we can see net income was $2,370.
So on our indirect method cash flow statement we start at the top
with net income of 2,370.
Notice I already have the answer at the bottom,
net cash from operations of 17,400, because whatever we do in this section,
we have to give the same answer that we got under the direct method.
Okay, so far, so good.
Next step in our algorithm was to adjust for
components of net income tied to non-cash items or investing activities.
We could ignore investing activities for Relic Spotter because they
didn't have any gains or losses on sale of PP&E or investments.
So, it really involves adding back the depreciation, amortization.
Here is the income statement, again, we had metal detector depreciation of 3,000,
software amortization expense of 350, and building depreciation expense of 1,500.
I'm going to combine those into one line item called depreciation and
amortization of 31,850.
And we're going to add that back to remove that non-cash expense from net income.
>> Do we always combine all of the depreciation and
the amortization into one line?
>> Again, this is a choice by managers about how much or
how little detail they want to provide on their statements.
One thing I will say here is that generally the only place you can find
depreciation and
amortization expense in the statements is on the statement of cash flows.
Yes, it's part of the income statement but it's often combined with other items and
not broken out separately.
But you'll always be able to find it broken out separately in the operating
section of the statement of cash flows.
The last step in our algorithm is to go through all the asset and
liability accounts related to operating activities.
In other words, the working capital accounts.
Add or subtract the change in the balance based on the balance sheet equation.
So, start with accounts receivable.
Accounts receivable went from 0 to 4,200, so it went up by 4,200 during the year.
That's a noncash asset going up,
which means we need to subtract it on the cash flow statement to stay in balance.
Notes receivable went from 0 to 5000, noncash asset going up.
To stay in balance, we need to subtract that on the cash flow statement, so
we subtract change in notes receivable to 5,000.
Interest receivable went from 0 to 250.
Noncash asset going up, so we subtract it on the cash flow statement.
Inventory went from 0 to 12,000.
Noncash asset going up, so we subtract it on the cash flow statement.
Prepaid advertising went from 0 to 4,000.
And again, noncash asset going up, we subtract that on the cash flow statement.
>> I think I understand.
Assets are always subtracted when the indirect method is used.
>> No, no, no, no, no, that's just a function of looking at a start up company,
which of course, had a balance of 0 in all the assets at the beginning of the year,
and so all the assets went up.
In a future video, we'll look at examples where companies do add assets to their
statement of cash flows because they've had assets go down during the year.
If we look at the rest of the asset side of balance sheet, we have land, buildings,
metal detectors, software, we don't do anything with those in the operating
section because we've already taken care of those in the investing activities.
So we move on to the liabilities side of the balance sheet.
We have accounts payable went from 0 to 2,000,
that's an increase in a liability of 2,000.
Note, we're on the other side of the equal sign with the liability, so
liability going up means that we need to add it to the cash flow statement.
Interest payable went from 0 to 4,900, so
that's an increase in a liability of 4,900.
Which we need to add to the cash flow statement to
keep the balance sheet equation in balance.
Income taxes payable went from 0 to 630.
Again, an increase in a liability gets added to the cash flow statement.
And unearned revenue went from 0 to 1,100,
that's an increase in liability that gets added to the cash flow statement.
>> And I think I am not wrong to assume that it is not necessarily
the case that liabilities are always added under the indirect method.
>> Wow, there were a lot of negatives there.
I'm not really sure what the question was.
But you should not assume that liabilities are always added on the cash
flow statement.
Again, because we are looking at a start up,
all the liabilities went up in value and so we added them.
We will see examples where liabilities go down during the year and
we end up subtracting them on the cash flow statement.
Going back to the balance sheet, the next accounts you would have would be mortgage
payable, common stock, additional paid-in-capital.
But we already took care of those with the cash flow from financing activities.
And retained earnings, that's just net income and
dividends which we've also taken care of.
So looks like we're done, which is a good thing because we're out of space on
the indirect method cash flow statement here on the right.
And if you add everything up, you'll find that we get the same answer,
17,400, that we got under the direct method.
So putting it all together,
this is what Relic Spotters cash flow statement is going to look like.
Cash flows from operating activities are going to be under the indirect method.
And then we'll have cash flow from investing and
financing activity under the direct method.
In terms of analysis, what this statement tells us is that this company is
still in the early growth stage of its life cycle.
We do have positive cash from operations, 17,400, but that's nowhere
near enough to cover all the cash out flow for investing activities.
So Relic Spotter had to go out and raise a lot of cash through financing activities,
both through stock and mortgage payable.
So again, just like we did in prior videos,
we can look at these three buckets, operating, investing, and financing to get
a sense for where a company is in its growth stage and life cycle.
Now I want to focus just on the cash flow from operating activities section,
so we can talk about what we learned from this indirect method presentation.
First thing we learned is it gives us the two different pictures of the company's
performance during the year.
So we see Relic Spotter's net income, which answers the question,
did Relic Spotter price their rentals and sales high enough to cover all the costs
of running the business, and thus post a profit, and we can see they did.
They had a profit of 2,370.
Then at the bottom, we see net cash from operations which answers the question,
did Relic Spotter have more cash coming in than cash going out in activities
related to running the business?
And here we see that that was the case also.
Between those two pictures of the business, we see all the discrepancies,
all the reason why we got different answers.
And the biggest discrepancy is the depreciation and amortization.
And that make sense because net income includes an expense or a charge for using
up these fixed assets, using the buildings and metal detector and softwares.
Whereas there is no cash implications of doing that, and so
it doesn't effect cash from operations.
So anytime you look at companies that are very capital intensive, they have a lot of
long term assets, you'll see this difference between net income and
cash from operations is primarily driven by this depreciation amortization.
Then we have all of the changes in working capital that have created discrepancies
between net income and cash flow.
And from an analysis point of view, I think these are the most interesting and
important lines to focus on in the cash flow statement.
because what these lines are telling you is that some management activity is
creating a wedge between cash flows and revenue and expense recognition.
So what you want to do is focus on the really big numbers and
try to understand what's going on.
So for instance, the biggest number is the change in inventory is a negative 12,000.
What that represents is that Relic Spotter purchased $12,000 more inventory in
cash than they needed for their level of sales which were recognized in net income.
What you want to do now is dig in and try to find out what caused that.
So did Relic Spotter management buy a bunch of inventory that they couldn't sell
because nobody wanted it?
Then this would be bad news.
Or, were they getting some kind of volume discounts, and so they were buying
excess inventory in advance of future sales which would be good news.
The cash flow statement's not going to tell you which one it is, but
it's going to tell you, you need to dig into these further.
As another example, a big discrepancy that you often see is changes in
accounts receivable, which in case of Relic Spotter was negative 4,200.
This indicates that they booked more sales than they collected cash.
This could be good news if their sales are growing dramatically and
they just haven't had a chance to collect them yet.
Or it could be bad news if their sales on account to customers are not getting
collected because the customers are not paying, they're in financial difficulty.
Again, we don't know which scenario is going
on just by looking at the cash flow statement.
What it does is it highlights we need to dig into these further.
So you want to look for the big numbers in these changes in working capital.
And these are going to be a starting point for
further information gathering to try to figure out what's going on at the company.
So that was our first trip through putting together an indirect
method cash flow statement using the balance sheet and the income statement.
Not clear yet? Don't worry,
there are more examples coming in future videos.
I'll see you then.
>> See you next video.
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