annotated-three_cash_flows_completed%20assignment.docx

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University Of Chicago *

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Finance

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Feb 20, 2024

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Company A 2017 2016 2015 Major sources of cash Inventories, deferred income taxes, proceeds from sale of property and investments, proceeds from business unit, proceeds from sales of receivables, proceeds from debt issuances, increase in short-term borrowings, proceeds from sale leaseback financing Inventories, proceeds from sale of property and investments, proceeds from debt issuances, proceeds from sale leaseback financing Proceeds from sale of property and investments, increase in short-term borrowings, proceeds from sale leaseback financing Major uses of cash accounts payable, operating activities, debt repayment, debt issuance cost, PPE purchases deferred income taxes, accounts payable, operating activities, debt repayment, decrease in short-term borrowings, PPE purchases, debt issuance cost deferred income taxes, inventories, operating activities, PPE purchases, debt repayment, debt issuance cost CFO > NI? no yes no Major reasons for difference between CFO and NI tax valuation allowance, gain on sale of assets tax valuation allowance, inventories gain on sale of assets, deferred income taxes Is CFO > Capex? No No No Is CFO > Capex + Dividends? no no no If CFO < Capex + Dividends, how did the company finance Capex + Dividends? Yes; the company financed their capital expenditures and dividends through proceeds from their investing activities (sales of property and investments, receivables etc.) Yes; the company financed their capital expenditures and dividends through proceeds from their investing activities and their financing activities (debt issuances) Yes; the company financed their capital expenditures and dividends through proceeds from their investing activities Trend in Net Income Net income reduced from 2015 to 2016 but increased from 2016 to 2017. It has increased overall from 2015 to 2017 Trend in CFO CFO increased from 2015 to 2016 but fell from 2016 to 2017, it has increased overall

Trend in Capex Gross Capex declined over the 3 years, and net Capex fell from 2015 to 2016 and increased from 2016 to 2017 but declined overall across the three years Trend in major working capital accounts Cash inflow from inventories increased over the three years which means the inventory account amounts fell over the three years. Accounts payable also fell over the three years. Total working capital increased over the three years Overall assessment of the financial strength of the company Firstly, the company has a negative CFO for all three years and because of the year-to-year fluctuations there isn’t much of an indication of an upward trend. A negative CFO would be normal for a young company - however, the company has a net negative CFF for 2015 and 2017 and had more debt repayment than issuance in 2017 (the most recent year). This is indicative of a declining company. Furthermore, the company’s CFI is positive for all three years. It is selling off more of its PPE than it is acquiring which is also indicative of a company in the later stages of its life. This also shows that the company is selling its long term assets to fund its operations which demonstrates declining operations and a weak financial situation. Therefore, on a 1 to 5 scale I would give the company a 2. CFO = Cash flow from operating activities; NI = Net Income; Capex = Capital expenditures, i.e. investments into long-lived assets Major working capital accounts: Accounts Receivable, Inventory, Accounts Payable

Company B 2018 2017 2016 Major sources of cash stock-based compensation expense, accounts payable, proceeds of stock issuance, proceeds from exercise of stock options Remeasurement of preferred stock warrant liability, stock-based compensation expense, accrued liabilities, accounts payable inventory reserves, stock-based compensation expense, accounts payable, accrued liabilities Major uses of cash Remeasurement of preferred stock warrant liability, inventory, prepaid expenses, purchase of property and equipment Deferred income taxes, inventory, prepaid expenses, purchase of property and equipment Deferred income taxes, inventory, prepaid expenses, purchase of property and equipment CFO > NI? yes yes yes Major reasons for difference between CFO and NI stock-based compensation expense, proceeds from stock issuance, depreciation and amortization Remeasurement of preferred stock warrant liability, stock-based compensation expense, accrued liabilities inventory reserves, stock-based compensation expense, accounts payable, accrued liabilities Is CFO > Capex? yes yes yes Is CFO > Capex + Dividends? yes yes yes If CFO < Capex + Dividends, how did the company finance Capex + Dividends? No; the company financed their Capex + dividends through operating and financing activities No; the company financed their Capex + dividends through operating activities No; the company financed their Capex + dividends through operating activities Trend in Net Income Net income decreased from 2016 to 2017 and then increased in 2018, but increased overall Trend in CFO CFo also decreased from 2016 to 2017 and then increased in 2018, but increased overall Trend in Capex Capex increased from 2016 to 2017 then decreased in 2018 and increased overall but was largely constant through the years Trend in major working capital accounts The amount in the inventory account increased on the cash flow statement year-to-year across the three years which means the actual amount decreased across the three years. Prepaid expenses increased and then decreased on the cash statement, as did accrued liabilities. Accounts payable decreased and then increased which means in the most recent year the company bought more on credit than before Overall assessment of the financial strength of the company The company’s CFO indicates inflow and increased by nearly 60% over the three years, which means the company’s core business activities are fairly profitable and is a sign of financial

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strength. Furthermore, the steady Capex outflow indicates a growing company, though investing activities do not seem to be increasing. The cash inflow from financing - especially the large amount in the most recent year - also indicates a company trying to expand its resources. Within this context, the company saw a net increase in cash across the three years, which also signifies financial strength. Therefore, I would give this company a 5 on the scale. CFO = Cash flow from operating activities; NI = Net Income; Capex = Capital expenditures, i.e. investments into long-lived assets Major working capital accounts: Accounts Receivable, Inventory, Accounts Payable

Company C 2018 2017 2016 Major sources of cash stock-based compensation, accounts payable, proceeds from property and equipment incentives, sales and maturities of marketable securities, proceeds from long-term debt and other stock-based compensation, accounts payable, accrued expenses and other, unearned revenue, proceeds from property and equipment incentives, sales and maturities of marketable securities stock-based compensation, accounts payable, unearned revenue, sales and maturities of marketable securities Major uses of cash inventories, accounts receivable, purchases of property and equipment, acquisitions, purchases of marketable securities, repayments of debt inventories, accounts receivable, purchases of property and equipment, purchases of marketable securities, repayments of debt inventories, accounts receivable, purchases of property and equipment, purchases of marketable securities, repayments of debt CFO > NI? no yes no Major reasons for difference between CFO and NI purchases of property and equipment, acquisitions, purchases of marketable securities, repayments of debt purchases of property and equipment, purchases of marketable securities, repayments of debt purchases of property and equipment, purchases of marketable securities, repayments of debt Is CFO > Capex? no yes yes Is CFO > Capex + Dividends? no yes yes If CFO < Capex + Dividends, how did the company finance Capex + Dividends? yes; the company used operating and financing activities to finance capex + dividends no; the company used operating activities to finance capex + dividends no; the company used operating activities to finance capex + dividends Trend in Net Income increased over the three years Trend in CFO increased over the three years Trend in Capex increased over the three years Trend in major working capital accounts Inventory accounts decreased over the three years, which means their actual total amounts increased over the three years. Same trend with accounts receivable. Accounts payable increased over the three years which means the company bought more on credit of the three years

Overall assessment of the financial strength of the company Increase in CFO across the three years suggests that the company’s core operations are profitable and is a sign of financial strength. Furthermore, the cash outflow from investing activities increased across the three years which is a sign of an expanding company. However, the cash outflow from the financing activities for 2015 and 2016 suggests more debt repayment than debt issuance which is somewhat at odds with the previous two metrics - both of which suggest a young, growing company. Still, there was a net cash inflow from financing in 2017 which is in line with the aforementioned image of the company. Overall, I would give the company a 3 on the scale. CFO = Cash flow from operating activities; NI = Net Income; Capex = Capital expenditures, i.e. investments into long-lived assets Major working capital accounts: Accounts Receivable, Inventory, Accounts Payable

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