Cash Flows: Financial vs.

Accounting
K. Stephen Haggard, Ph.D.
 Cash Flows from Assets to Investors
assets create cash flows and should flow to bond and share holders

CF(A) = CF(B) + CF(S)

where
CF(A) = cash flow from assets
CF(B) = cash flow to creditors (bondholders)
= Interest – (End LTD – Beg LTD)*
Long Term Debt not total debt;

CF(S) = cash flow to shareholders

= Dividends – (Stock sold – Stock repurchased)
stock as in stock in the company

*note LTD, not Total Debt

 Example this is a cash flow from
creditors, thus subtracted (not
goint to them)
CF(B) = Interest – (End LTD – Beg LTD)
= 49 – (471 – 458) = 36
CF(S) = Dividends – (Stock sold – Stock repurchased)
= Dividends – (Increase in common stock and
capital surplus – Increase in treasury stock)
how much = 43 – (((347+55)-(327+32))-(26 – 20))
was sold
= 43 – (43- 6) = 6 2014 - 2013

CF(A) = CF(B) + CF(S) = 36 + 6 = 42 stock that has been

repurchased
 figuring out where the cash flow came from as opposed to where it went

Figuring Cash Flow From Assets

CF(A) = OCF – NCS – ΔNWC
Net capital spending (NCS) = End net fixed assets – Beg
net fixed assets + depreciation to compensate the amount we lowered it by
= 1118 – 1035 + 90 = 173
net working capital consumes cash
ΔNWC = End NWC – Beg NWC when it increases, if it increases CA
is increaseing thus consuming cash.
= ending
(761 - 486)
CA- ending CA
– (707 – 455)
ending CL- ending CL
= 23 liability account increases will
increase cash

Operating cash flow (OCF) = EBIT + Depreciation – Taxes =

219 + 90 – 71 = 238 cash flow but taxes are real so we subtract (only the current becasue the
produced by the business in the year; add depreciation becuase its not a real

defered isnt a real cash flow)

CF(A) = OCF – NCS – ΔNWC = 238 – 173 – 23 = 42
Note: This is the same CF(A) we obtained from CF(B) +
CF(S)
 Accounting Statement of Cash Flows
• Accountants realize that the Income Statement
does not actually represent cash flows.
• To fix this problem, they produce a Statement of
Cash Flows.
• Three sections: Operations, Investing & Financing
• Major difference with finance: Interest expense is
considered part of operations instead of
financing. accountant thing its a cost of operation, fince thinks its a cost of financing
• Typically uses Net Income as a starting point and
makes adjustments for non-cash items (indirect).
direct methid: start with sales and subtract expenses
we have to make adjustments for non-cash
such as depreciation and defered taxes.

increase in non-cash CA that’ll decrease

cash. increase in CL that’ll increase cash.

from the account point of view interest is

already subtracted out (via net income
item bu not adding it back) fnace
departmetn would have included it in the
financing activities section

“aquision of FA’ came from the foot notes

footnotes