analyze a statement of cash flows to determine the financial strengths and weaknesses of a company.
Understanding a company's major sources and uses of cash, and how cash is being used in the business through the analysis of the statement of cash flows, is essential. This analysis guides financial decision-making and is used to determine financial strengths and weaknesses within the company.
The accounting manager has asked you to prepare a 5- to 10-minute presentation for company stakeholders summarizing your analysis of the statement of cash flows and the financial strengths and weaknesses of the company.
Using the company that you selected from the approved list, review the Management Discussion and Analysis (MD&A) section of the annual report and the management’s discussion regarding the statement of cash flows or any discussion on the operating, investing, or financing activities of the company. In addition, refer to the statement of cash flows financial statement.
Create a PowerPoint presentation (5-8 slides) that summarizes your analysis and addresses the following. Include screenshots from the statement of cash flows as needed to illustrate key findings and information.
Discuss the company's major sources of cash in each of the three sections of the statement of cash flows. Provide at least two major sources of cash for each section.
Discuss the company's major uses of cash in each of the three sections of the statement of cash flows. Provide at least two major sources of cash for each section.
Discuss the major differences between the net income and the cash provided or used by operating activities, and explain the cause of the major difference between the two values. Note that you may need to reconcile the differences between net income reported and the subtotal of cash provided or used by "operating" activities. What were the reconciling items, how were these accounts adjusted, and why do we not just report "net income" without adjustments?
Summarize the financial strengths of the business and justify your analysis based on evidence in the statement of cash flows. Include discussion as to whether or not you anticipate the company will experience continued success and explain your answer. Only information from the statement of cash flow should be referenced. Note that this analysis will be more than just the amounts of either the cash provided or used. You may need to review the notes in the MD&A for additional information.
Full Answer Section
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- Depreciation and Amortization: Non-cash expenses that are added back to net income.
- Briefly explain why these are significant sources.
Slide 4: Operating Activities - Uses of Cash
- Screenshot: Excerpt from Apple's operating activities section.
- Major Uses:
- Increase in Inventory: Cash used to purchase more inventory.
- Increase in Accounts Receivable: Cash tied up in sales made on credit.
- Briefly explain the impact of these uses.
Slide 5: Investing Activities - Sources and Uses
- Screenshot: Excerpt from Apple's investing activities section.
- Sources:
- Proceeds from Sales of Marketable Securities: Cash received from selling investments.
- Uses:
- Purchases of Property, Plant, and Equipment (PP&E): Cash used to expand or maintain infrastructure.
- Purchases of Marketable Securities: Cash used to invest in securities.
- Explain the significance of these activities in Apple's growth strategy.
Slide 6: Financing Activities - Sources and Uses
- Screenshot: Excerpt from Apple's financing activities section.
- Sources:
- Issuance of Debt: Cash received from borrowing.
- Uses:
- Repurchase of Common Stock: Cash used to buy back shares.
- Payment of Dividends: Cash distributed to shareholders.
- Explain the implications of these activities for Apple's capital structure and shareholder returns.
Slide 7: Net Income vs. Cash from Operations
- Explanation:
- Net income is an accrual accounting concept, while cash from operations reflects actual cash flow.
- Major Reconciling Items:
- Depreciation and amortization (non-cash expenses).
- Changes in working capital (accounts receivable, inventory, accounts payable).
- Why Adjustments? Accrual accounting recognizes revenue and expenses when they occur, not necessarily when cash changes hands. The cash flow statement reconciles these differences.
- Give an example of how one of the reconciling items affected the cash flow.
Slide 8: Financial Strengths and Outlook
- Strengths:
- Strong operating cash flow, indicating robust core business performance.
- Significant cash reserves, providing financial flexibility.
- Ability to generate cash despite large stock repurchases and dividend payments.
- Outlook:
- Based on the strong cash flow from operations, Apple's financial position appears stable.
- Continued success is likely, given the ability to generate large amounts of cash.
- Note that the analysis is based solely on the cash flow statement and MD&A.
- Justification: Cite specific figures from the cash flow statement to support your analysis.
Key Considerations for Your Presentation:
- Clarity: Use clear and concise language.
- Visuals: Utilize screenshots and graphs to illustrate key points.
- Context: Explain the significance of each cash flow activity in the context of Apple's overall business strategy.
- MD&A: Be sure to reference the Management Discussion and Analysis section of the annual report. This section will give you a great deal of the context you will need.
- Practice: Rehearse your presentation to ensure you can deliver it within the allotted time.
By following this outline, you'll be able to create a comprehensive and informative presentation on Apple's cash flow analysis.