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Can anyone take me thru the Statement of Cash Flow. I need to learn how to analyze the Cash Flow statement.

Thank you in advance,

D i n o
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Hi Dino,
These two Rule Maker articles should get you up and running on the Cash Flow Statement:

http://www.fool.com/portfolios/rulemaker/1999/rulemaker990823.htm

http://www.fool.com/portfolios/rulemaker/1999/rulemaker990921.htm

Hope this helps.
Ev Luecke - St. Louis, Mo.
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Dear Dino,

Insert shameless self-promotion

See

http://boards.fool.com/Message.asp?id=1030024000320000&sort=id

It is somewhat overlong, but at least the cash flow section shows what the statement looks like.

All flames about it should go directly to me (as long as they aren't TOO nasty :))

Do you have any specific questions BTW?

Lleweilun Smith
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Hi Lleweilun,
As soon as I pushed the submit reply button on my last post #1073 I thought, "shoot I should have referred him to the Reading Financial Statements FAQ."
Absolutely he needs to read and print the FAQ out as a reference, and a good one at that I might add.


Ev Luecke - St. Louis, Mo.
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Regarding the Cash King Margin and Free Cash Flow. How should we treat financial companies who have negative cash from ops because purchases/sales of securities affect the total assets/liabilities? For example here is Morgan Stanley Dean Witter's CF Statement from their 1999 10-K:

fiscal year (dollars in millions) 1999 1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES

Net income $ 4,791 $ 3,276 $ 2,586
Adjustments to reconcile net income to net cash (used for) provided by
operating activities:
Non-cash charges included in net income:
Cumulative effect of accounting change -- 117 --
Gain on sale of businesses -- (685) --
Deferred income taxes (160) (55) (77)
Compensation payable in common or preferred stock 675 334 374
Depreciation and amortization 541 575 338
Provision for consumer loan losses 529 1,173 1,493
Changes in assets and liabilities:
Cash and securities deposited with clearing organizations or
segregated under federal and other regulations 839 (3,641) (1,691)
Financial instruments owned, net of financial instruments sold,
not yet purchased (22,081) 11,127 1,730
Securities borrowed, net of securities loaned (8,798) (5,061) (10,561)
Receivables and other assets (11,276) 2,114 (13,808)
Payables and other liabilities 5,669 6,095 19,058
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Net cash (used for) provided by operating activities (29,271) 15,369 (558)
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CASH FLOWS FROM INVESTING ACTIVITIES
Net (payments for) proceeds from:
Office facilities (656) (358) (301)
Sale of businesses, net of disposal costs -- 1,399 --
Purchase of AB Asesores, net of cash acquired (223) -- --
Net principal disbursed on consumer loans (8,769) (2,314) (4,994)
Purchases of consumer loans -- -- (11)
Sales of consumer loans 2,997 4,466 2,783
Other investing activities -- -- (5)
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Net cash (used for) provided by investing activities (6,651) 3,193 (2,528)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments for) short-term borrowings 9,994 5,620 (1,336)
Securities sold under agreements to repurchase, net of securities
purchased under agreements to resell 21,327 (14,407) 3,080
Net proceeds from (payments for):
Deposits 2,200 (796) 2,113
Issuance of common stock 270 186 194
Issuance of put options 9 -- --
Issuance of long-term borrowings 7,552 9,771 6,619
Issuance of Preferred Securities Issued by Subsidiaries -- 400 --
Issuance of Capital Units -- -- 134
Payments for:
Repayments of long-term borrowings (6,618) (7,069) (3,964)
Redemption of cumulative preferred stock -- (200) (345)
Redemption of Capital Units (416) -- --
Repurchases of common stock (2,374) (2,925) (124)
Cash dividends (575) (519) (416)
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Net cash provided by (used for) financing activities 31,369 (9,939) 5,955
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Dean Witter, Discover & Co.'s net cash activity for the month of
December 1996 -- -- (1,158)
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Net (decrease) increase in cash and cash equivalents (4,553) 8,623 1,711
Cash and cash equivalents, at beginning of period 16,878 8,255 6,544
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Cash and cash equivalents, at end of period $ 12,325 $ 16,878 $ 8,255
--------------------------------------------------------------------------------------------------------------------------


Marv
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Dear madmarv,

Waves a white flag

Aiee! I don't understand the statements there at all...

Normally "cash used in investments" has to do with purchasing stores etc. and the Fool's definition of FCF to equity makes sense. But in the case of MSDW, financial instruments ARE their business. Certainly one must include in FCF changes in the value of the marketable securities...

One note though. I see what looks to me like a lot of repos (e.g. Securities sold under agreements to repurchase, net of securities purchased under agreements to resell). It is my understanding that these function essentially as a loan, though they look different on a balance sheet (securities are sold, with an obligation to repurchase them at a later date at a higher price, the securities themselves are the collateral for the loan).

Any comments y'all? The Fool's models don't seem to be as useful for finance companies, they work a bit different...

Lleweilun Smith
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The statement of cash flows are from the balance sheet. What you look at is all items that effect cash in the company. Examples are accumulated depreciation from balance sheet is added back into statement of cash flows. all expenses, income tax, pre paids, ect, also, any gains or losses on sale of investments are included back in. example, a gain on sale of investments are deducted from cash flow. The cash flow statement involves all those items effected by the use of cash for the company.This is to show cash from operating, investment and finacing transactions by the company. accounts receivables if lower than previous month or period is added back into cash flow, acct rec increases are deducted from it. acct payables are added back in if the acct payable increases assuming that the payables have not been paid yet this effects cash. There are many more items that go into it, remember all items that have an effect on cash are in the statement of cash flows. I hope i helped a little. tom simakis
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"a gain on sale of investments are deducted from cash flow."

Come again? Shouldn't a gain on an investment be added back to the Cash Flow Statement?

I guess the larger question I'm trying to get at is how do you separate the operating cash flows from non-operating cash flows in a financial company?

Marv
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Come again? Shouldn't a gain on an investment be added back to the Cash Flow Statement?

A gain on sale of investment is deducted from the Operating cash flow section. The proceeds from the sale of any investments are included as a cash inflow in the Investing cash flow section. The reason they are subtracted from the Operating section is that the gain is part of net income.

Mike
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Dear madmarv,

I guess the larger question I'm trying to get at is how do you separate the operating cash flows from non-operating cash flows in a financial company?

With great difficulty in some cases :S

I guess my first stab would be to say that you need to go "division-by-division" in a company to figure this out. Berkshire Hathaway's value is tangibly affected by a decline in the price of Coke shares; yet the value of its flight services business isn't.

I would guess that one could probably call anything which isn't the sale of a division of a company "operating cash".

Lleweilun Smith
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The statement of cash flows are from the balance sheet. What you look at is all items that effect cash in the company. Examples are accumulated depreciation from balance sheet is added back into statement of cash flows

All information from the statement of cash flows (SCF) is not from the balance sheet. In fact, accumulated depreciation is not even located on the SCF. Depreciation expense is added back to net income because it is a non-cash expense.

all expenses, income tax, pre paids, ect, also, any gains or losses on sale of investments are included back in. example, a gain on sale of investments are deducted from cash flow

Gain on sale is deducted from net income. This is because the number represented by gain on sale is not actual cash received, but cash less historical cost plus accum. depreciation. Consequently, gain is deducted from (loss added to) net income and cash received for the sale is recorded in the Investing section of the SCF.

This is a very long and complex topic. One of discussion here at my office. It is kind of a puzzle of sorts. If you are still confused after reading the TMF articles I would be happy to go over a specific SCF line by line and (try to) explain what is going on.

John...
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this is an old post, but you separate cash flows from operating activities by looking at all cash items that are used in the course of running the business. what you would need to operate the business, these items are called cash flow from operations, then you will have cash flow from investing, which can be buildings , equipment, ect, what you spend on the business to create or generate revenue or increase assets are investing activity, financing would be notes borrowed for cash purposes, loans from banks ect are financing activites. separate the items that are used just for operating the business, this tells you if you are generating enough cash flow from operations to sustain your business. it you are loosing money in cash flows from operations, this isnt a good thing. They separate the items so you can have a clear picture of what cash is doing and going.
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this is an old post, but you separate cash flows from operating activities by looking at all cash items that are used in the course of operating the business. what you would need to operate the business, these items are called cash flow from operations, then you will have cash flow from investing, which can be buildings , equipment, ect, what you spend on the business to create or generate revenue or increase assets are investing activity, financing would be notes borrowed for cash purposes, loans from banks ect are financing activites. separate the items that are used just for operating the business, this tells you if you are generating enough cash flow from operations to sustain your business. it you are loosing money in cash flows from operations, this isnt a good thing. They separate the items so you can have a clear picture of what cash is doing and going.
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