Finance Chapter 2 Cash Flow

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

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