FAR CASHFLOWS

Classifying Inflows and Outflows of Cash Classification of Inflows and Outflows

- The statement of cash flows summarizes the firm’s cash flow 1. Inflows (Sources) of Cash 2. Noncash charge: Any expense deducted on the income
over a given period. - Decrease in any asset Increase in any liability Net profits statement that does not involve a direct cash outlay during
- Cash and marketable securities act as a reservoir of liquidity. after taxes Depreciation and other the period.
- The reservoir increases with cash inflows and decreases - Non-cash charges
with cash outflows. - Sale of stock Fixed Assets and Retained Earnings
• Example: An increase in accounts payable by $1,000 is • Net Fixed Assets - the purchase price of all fixed
Three Categories of Cash Flow an inflow of cash. assets (Land, buildings, equipment, machinery, vehicles,
1. Operating Flows leasehold improvements)
- Cash inflows and outflows directly related to sales and 2. Outflows (Uses) of Cash • Gross Fixed Assets: measures the original investments
production of goods/services. - Increase in any asset decrease any liability net loss made in assets currently owned or operated.
• Example: Cash received from customers through the sale of - Dividends paid • Fixed Assets - long-term assets that a company has
goods or services performed. - Repurchase of stock purchased and is using for the production of its goods and
2. Investment Flows • Example: An increase in inventory by $2,500 is an services
- Cash flows associated with purchasing and selling fixed assets outflow of cash. • Direct entries of changes in retained earnings are not
and equity investments in other firms. included on the statement of cash flows. Instead, entries
• Example: Cash payments to acquire property, plant, and Depreciation and Noncash Charges for items that affect retained earnings appear as net profits
equipment (PPE), intangible assets, and other long-term assets. 1. Depreciation (amortization and depletion) are expenses or losses after taxes and dividends paid.
3. Financing Flows deducted on the income statement does not involve an • Non-cash charge - An expense that is deducted on the
- Cash flows from debt and equity financing transactions. actual outlay of cash (without actual cash outflows). income statement but does not involve the actual outlay of
• Example: cash during the period; includes depreciation, amortization,
• Cash proceeds from issuing bonds, loans, notes, and • A decrease in an asset such as the firm’s cash balance, is an and depletion.
borrowings (inflow). inflow cash. • Retained earnings changes do not appear directly in the
• Repayment of loans and other borrowings (outflow). • On the other hand, an increase in the firm’s cash balance statement of cash flows. Instead, their effects are seen as net
is an outflow of cash because additional cash is being tied profits/losses after taxes and dividends.
up in the firm’s cash balance.
 FAR FINANCIAL RATIOS
What are Financial Ratios? 1. Inventory Turnover: Measures liquidity of a firm’s inventory. 1. Gross Profit Margin: Measures the percentage of revenue
- Financial ratios are created with the use of numerical • Formula: Cost of Goods / Inventory remaining after deducting the cost of goods sold (COGS).
values taken from financial statements to gain 2. Average Collection Period: Evaluates credit and collection • Formula: Gross Profits = (Sales - COGS) / Sales
meaningful information about a company. The numbers policies. 2. Operating Profit Margin: Evaluates the percentage of profit
found on a company’s financial statements like: • Formula: Accounts Receivable / Average Sales per Day earned from operations before interest and taxes.
• balance sheet, • Average Sales per Day = Annual Sales / 365 • Formula: Operating Profits / Sales
• income statement, and 3. Average Payment Period: Measures the time a firm takes to 3. Net Profit Margin: Measures the percentage of each sales dollar
• cash flow statement pay its suppliers. remaining after all expenses.
• These ratios assess a company’s liquidity, leverage, • Formula: Accounts Payable / Average Purchase per Day • Formula: Earnings available for common stockholders
growth, margins, profitability, rates of return, • Average Purchase per Day = Annual Purchase / 365 / Sales
valuation, and more. 4. Total Asset Turnover: Measures how efficiently a firm uses 4. Earnings Per Share (EPS): Indicates how much profit is earned
assets to generate sales. per share of stock.
Financial ratios are grouped into five categories: • Formula: Sales / Total Assets • Formula: Earnings available for common stockholders
1. Liquidity Ratios / No. of Shares of Common Stock Outstanding
2. Leverage Ratios Debt Ratios - Indicates the amount of debt used to generate profits. 5. Return on Total Assets (ROA): Assesses how efficiently a firm
3. Efficiency Ratios 1. Debt Ratio: Measures the proportion of total assets financed by uses assets to generate profit.
4. Profitability Ratios creditors. • Formula: Earnings available for common stockholders
5. Market Value Ratios • Formula: Total Liabilities / Total Assets / Total Assets
• Example: Bartlett Company’s debt ratio in 2012 was 6. Return on Common Equity (ROE): Measures the return earned
Liquidity Ratios - Measures a firm’s ability to meet short-term 45.7%. on shareholders’ investments.
obligations. 2. Times Interest Earned Ratio: Measures a firm’s ability to make • Formula: Earnings available for common stockholders
1. Current Ratio: Evaluates a firm’s ability to meet short-term interest payments. / Common Stock Equity
liabilities. • Formula: Earnings Before Interest and Taxes (EBIT) /
• Formula: Current Assets / Current Liabilities Taxes Market Ratios - Used to assess a company’s stock value.
2. Personal Liquidity Ratio: It indicates the percent of annual • Example: Bartlett Company’s ratio was 4.5. 1. Price/Earnings (P/E) Ratio: Shows how much investors are
debt obligations that an individual can meet using current liquid 3. Fixed-Payment Coverage Ratio: Evaluates a firm’s ability to willing to pay per dollar of earnings.
assets. meet all fixed-payment obligations. • Formula: Market Price per Share of Common Stock /
• Formula: Total Liquid Assets / Total Current Debts • Formula: (EBIT + Lease Payments) / (Interest + Lease Earnings per Share
3. Quick (Acid-Test) Ratio: Similar to the current ratio but Payments) + {(Principal payment + Preferred stock 2. Market/Book (M/B) Ratio: Assesses investor confidence in the
excludes inventory due to its lower liquidity. dividends) x [1/(1 - T )]} firm’s value.
• Formula: (Current Assets - Inventory) / Current • EBIT - Earnings Before Interest and Taxes • Formula: Market Price per Share of Common Stock /
Liabilities Book Value per Share of Common Stock
Profitability Ratios - Assesses a company’s ability to generate • BVSCS = Common Stock Equity / No. of Shares pf
Activity Ratios - Measures how efficiently a firm converts accounts earnings. Common Stock Outstanding
into sales or cash inflows.
 EXAMINATION: CASH FLOWS AND FINANCIAL RATIOS
PART I: IDENTIFICATION (1-30) 23. The profitability ratio that measures the percentage of revenue 43. The ____ period ratio evaluates the efficiency of credit and
1. The statement that summarizes the firm’s cash flow over a given remaining after deducting cost of goods sold. collection policies.
period. 24. The ratio that evaluates how efficiently a firm uses its assets to 44. The ____ period ratio measures the time a firm takes to pay
2. The three main categories of cash flows. generate profit. suppliers.
3. The type of cash flow that includes cash received from customers 25. The ratio that measures the proportion of total assets financed 45. The ____ turnover ratio measures how efficiently assets generate
through sales. by creditors. revenue.
4. The type of cash flow related to purchasing fixed assets and equity 26. The formula for Return on Common Equity (ROE). 46. The ____ ratio measures the proportion of total assets financed by
investments. 27. The financial ratio that excludes inventory due to its lower debt.
5. The type of cash flow that involves issuing bonds, loans, and liquidity. 47. The ____ ratio evaluates a company’s ability to make interest
borrowings. 28. The market ratio that compares a company’s stock price to its payments.
6. The term for cash coming into a business. book value per share. 48. The fixed-payment coverage ratio assesses a firm’s ability to
7. The term for cash going out of a business. 29. The formula for Total Asset Turnover. meet all ____ obligations.
8. The non-cash expense deducted from the income statement that 30. The non-cash charge that includes amortization and depletion. 49. The ____ margin measures the percentage of revenue remaining
represents asset wear and tear. after deducting COGS.
9. The term for long-term assets that a company uses for production. PART II: FILL IN THE BLANKS (31-60) 50. The ____ margin evaluates profit from operations before interest
10. The type of financial statement that provides numerical values 31. Cash and marketable securities act as a reservoir of ____. and taxes.
for financial ratios. 32. An increase in accounts payable is an ____ of cash. 51. The ____ margin measures the percentage of each sales dollar
11. The category of financial ratios that measures a firm’s ability to 33. An increase in inventory is an ____ of cash. remaining after all expenses.
meet short-term obligations. 34. Depreciation, amortization, and depletion are considered ____ 52. The ____ per share ratio indicates how much profit is earned per
12. The category of financial ratios that measures how efficiently a charges. share of stock.
firm converts resources into revenue. 35. The sale of stock is classified as a cash ____ (inflow/outflow). 53. The return on total assets (ROA) assesses how efficiently a firm
13. The category of financial ratios that assesses a company’s ability 36. Dividends paid to shareholders are considered a cash ____ uses ____ to generate profit.
to generate earnings. (inflow/outflow). 54. The return on common equity (ROE) measures the return earned
14. The category of financial ratios used to assess a company’s stock 37. Cash payments for purchasing property, plant, and equipment on shareholders’ ____.
value. fall under ____ cash flows. 55. The price/earnings (P/E) ratio shows how much investors are
15. The formula for the Current Ratio. 38. Net fixed assets include the purchase price of all ____ assets. willing to pay per ____ of earnings.
16. The formula for the Quick (Acid-Test) Ratio. 39. The balance sheet, income statement, and ____ statement provide 56. The market/book (M/B) ratio assesses investor confidence in
17. The formula for Inventory Turnover. data for financial ratios. the firm’s ____.
18. The formula for the Debt Ratio. 40. The ____ ratio measures a firm’s ability to cover short-term 57. The book value per share formula is ____ stock equity divided by
19. The formula for Gross Profit Margin. liabilities. the number of shares outstanding.
20. The financial ratio that measures how much investors are willing 41. The ____ ratio excludes inventory from the current ratio 58. The ____ financial ratio assesses a company’s stock valuation.
to pay per dollar of earnings. calculation. 59. The ____ ratio measures a firm’s profitability relative to its sales.
21. The formula for Earnings Per Share (EPS). 42. The ____ turnover ratio measures how quickly inventory is sold 60. The ____ ratio assesses a firm’s liquidity but does not include
22. The ratio that measures a firm’s ability to pay interest expenses. and replaced. prepaid expenses.
 EXAMINATION: FINANCIAL RATIO FORMULAS
For each of the following items, provide the correct formula and identify the type of financial ratio it belongs to (Liquidity, Efficiency, Profitability, Debt, or Market Value).

PART I: FORMULA IDENTIFICATION (1-30) 16. The formula for Price/Earnings (P/E) Ratio

1. The formula for Current Ratio 17. The formula for Market/Book (M/B) Ratio

2. The formula for Quick (Acid-Test) Ratio 18. The formula for Book Value per Share (BVSCS)

3. The formula for Inventory Turnover 19. The formula for Annual Sales per Day

4. The formula for Average Collection Period 20. The formula for Annual Purchases per Day

5. The formula for Average Payment Period 21. The formula for Cost of Goods Sold (COGS) Ratio

6. The formula for Total Asset Turnover 22. The formula for Earnings Available for Common Stockholders

7. The formula for Debt Ratio 23. The formula for Total Liabilities to Total Assets Ratio

8. The formula for Times Interest Earned Ratio 24. The formula for EBIT Margin

9. The formula for Fixed-Payment Coverage Ratio 25. The formula for Cash Coverage Ratio

10. The formula for Gross Profit Margin 26. The formula for Dividend Payout Ratio

11. The formula for Operating Profit Margin 27. The formula for Operating Cash Flow Ratio

12. The formula for Net Profit Margin 28. The formula for Working Capital Turnover Ratio

13. The formula for Earnings Per Share (EPS) 29. The formula for Return on Investment (ROI)

14. The formula for Return on Total Assets (ROA) 30. The formula for Asset Utilization Ratio

15. The formula for Return on Common Equity (ROE)