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Mba 504 financial management and analysis week 11

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Mba 504 financial management and analysis week 11 1. Read and summarize chapter 24 of the Financial Management book in at least 500 words. – Answer the following questions as well: – Explain “free cash flow.” – How is it calculated? – What is a statement of cash flow? CHP24 ; Cash Flow Analysis n  objective  of  financial  analysis  is  to  assess  a  company’s  operatingperformance and financial condition. The information that an analysthas available includes economic, market, and financial information. Butsome of the most important financial data are provided by the companyin  its  annual  and  quarterly  financial  statements.  However,  the  choicesavailable  in  the  accrual  accounting  system  make  it  difficult  to  comparecompanies’ performance. These choices also provide the opportunity forthe management of financial numbers through judicious choice ofaccounting  methods.  For  example,  $1  of  net  income  for  one  companymay  not  be  equivalent  to  $1  of  net  income  of  another  company.  Cashflows  provide  the  financial  analyst  with  a  way  of  transforming  netincome based on an accrual system to a more comparable medium. Addi-tionally, cash flows are essential ingredients in valuation: The value of acompany  today  is  the  present  value  of  its  expected  future  cash  flows.Therefore, understanding past and current cash flows may help the analyst  in  forecasting  future  cash  flows  and,  hence,  determine  the  value  ofthe  company.  Moreover,  understanding  cash  flow  allows  an  analyst  toassess the ability of a firm to maintain current dividends and its currentcapital expenditure policy without relying on external financing.DIFFICULTIES WITH MEASURING CASH FLOWThe  primary  difficulty  with  measuring  a  cash  flow  is  that  it  is  a  flow:Cash  flows  into  the  company  (cash  inflows)  and  cash  flows  out  of  thecompany  (cash  outflows).  At  any  point  in  time  there  is  a  stock  of  cashon hand, but the stock of cash on hand varies among companies becauseof the size of the company, the cash demands of the business, and a com-A24-Cash Flows  Page 797  Wednesday, April 30, 2003  12:15 PM 798 FINANCIAL STATEMENT ANALYSISpany’s  management  of  working  capital.  So  what  is  cash  flow?  Is  it  thetotal amount of cash flowing into the company during a period? Is it the totalamount of cash flowing out of the company during a period? Is it the netof the cash inflows and outflows for a period? Well, there is no specificdefinition of cash flow—and that’s probably why there is so much con-fusion  regarding  the  measurement  of  cash  flow.  Ideally,  the  analystneeds a measure of the company’s operating performance that is compa-rable among companies—something other than net income.A simple, yet crude method of calculating cash flow requires simplyadding  noncash  expenses  (e.g.,  depreciation  and  amortization)  to  thereported  net  income  amount  to  arrive  at  cash  flow.  For  example,  theestimated cash flow for Procter


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