[HW 3.5c] Derive a Cash Flow Statement

Pick a small public company (market cap under $1 billion) with a simple business that you find interesting.  You could pick a larger company, but the exercise may be a bit more difficult.

Go to Edgar, and pull down the income statement and balance sheet from the company’s latest 10Q or 10k.  (It might be easier with a 10Q).

Make sure that the balance sheets you use correspond to the period of the income statement.

The balance sheet will show a snapshot from the beginning and end of the quarter.  For each line on the balance sheet, calculate the change between the between the beginning and the end of the quarter and determine if that change was a source or use of cash.

Use that to see if you can explain the actual change in cash.   In the above example, cash changed by 30.8 million.  The statement is internally consistent because the total sources less the other uses foots to that 30.8 million.

Try to classify the changes between Operations, Investing, and Financing.  You will probably not be able get the dollar amounts to match with the numbers publicly reported on the cash flow statement, but show the variance to the publicly reported totals for Cash from Operations, Cash from Investing, and Cash from Financing.

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8 comments

  1. What do you mean when you ask “Classify the changes between Operations, Investing, and Financing”? Are we just supposed to use the balance sheet and income statement to make a statement of cashflows of our own and then compare it to the one released in the 10-Q?

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    1. You’re going to start with net income. Then you’ll look at the change in each account on the balance sheet and consider if each change is a source or use of cash. You’ll know you got it right if the sum of net income and all the balance sheet changes equals the change in cash. If it does, you’re 95% of the way there. The last step is to categorize the balance sheet changes between operating, investing, and financing.

      At the end you should be able to show a number for cash from operations, cash from investing, and cash from operations. The number you calculate for each of these may differ considerably from what is on Edgar. However, the sum of the three. Which is the net change in cash, should be identical.

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  2. So if you cant get the sum of net income and all the balance sheet changes to equal the change in cash (I’m currently roughly 5543000 off) im doing something wrong? Also how come when I look at the actual cashflow statements, some of the values, such as the one for accounts payable are inconsistent with that presented in the balance sheet?

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  3. If you’re off by $5.5 million then perhaps there’s an item that is half that amount which you’re considering as a source of cash but which is really a use of cash, or vice versa.

    Matching the actual cash flow statement is likely to be very difficult (read impossible) as there can be other items that can come up which move the numbers between categories. In aggregate, these other items will balance out to zero. So, I wouldn’t try to reproduce the “cash from operations” number in the Edgar document. There are just too many other accounting items to get there.

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  4. Sarah Breckinridge · · Reply

    What if our change in cash and our total income are negative?

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  5. If you can’t get it to all balance, don’t fret. This is a simple assignment but one that can be both difficult and aggravating.

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  6. why is an increase in total cash a use not a source?

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    1. There are a few ways to answer that question:
      One is that an increase in any asset is a use of cash.
      Another is that you can think of it as the company is using cash to buy short term money market instruments.
      A third is that sources and uses have to balance.

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