Please read the article about cash flow

AutoSave . Off H Document41 - Word Search maykel kalta MK X File Home Insert Design Layout References Mailings Review View Help Share Comments & Cut Times New Rome ~ 10 ~ A" A Aa Ap [ Copy AaBbCcDd AaBbCcDd AaBbC( AaBbCct AaB Find AaBbCCD Gc Replace Paste BIU ab X X A LA 1 Normal 1 No Spac... Heading 1 Heading 2 Title Subtitle Dictate Sensitivity Editor Format Painter Select Clipboard Font Paragraph Styles Editing Voice Sensitivity Editor What is it and why do I care? The statement of cash flows tells you how much cash went into and out of a company during a specific time frame such as a quarter or a year. You may wonder why there's a need for such a statement because it sounds very similar to the income statement, which shows how much revenue came in and how many expenses went out. The difference lies in a complex concept called accrual accounting. Accrual accounting requires companies to record revenues and expenses when transactions occur, not when cash is exchanged. While that explanation seems simple enough, it's a big mess in practice, and the statement of cash flows helps investors sort it out. The statement of cash flows is very important to investors because it shows how much actual cash a company has generated. The income statement, on the other hand, often includes noncash revenues or expenses, which the statement of cash flows excludes. One of the most important traits you should seek in a potential investment is the firm's ability to generate cash. Many companies have shown profits on the income statement but stumbled later because of insufficient cash flows. A good look at the statement of cash flows for those companies may have warned investors that rocky times were ahead. The Three Elements of the Statement of Cash Flows Because companies can generate and use cash in several different ways, the statement of cash flows is separated into three sections: cash flows from operating activities, from investing activities, and from financing activities The cash flows from operating activities section shows how much cash the company generated from its core business, as opposed to peripheral activities such as investing or borrowing. Investors should look closely at how much cash a firm generates from its operating activities because it paints the best picture of how well the business is producing cash that will ultimately benefit shareholders. The cash flows from investing activities section shows the amount of cash firms spent on investments. Investments are usually classified as either capital expenditures-money spent on items such as new equipment or anything else needed to keep the business running-or monetary investments such as the purchase or sale of money market funds. The cash flows from financing activities section includes any activities involved in transactions with the company's owners or debtors. For example, cash proceeds from new debt, or dividends paid to investors would be found in this section. Free cash flow is a term you will become very familiar with over the course of these workbooks. In simple terms, it represents the amount of excess cash a company generated, which can be used to enrich shareholders or invest in new opportunities for the business without hurting the existing operations; thus, it's considered "free." Although there are many methods of determining free cash flow, the most common method is taking the net cash flows provided by operating activities and subtacting capital expenditures (as found in the "cash flows from investing activities" section) Cash from Operations - Capital Expenditures = Free Cash Flow Page 1 of 1 517 words X English (Canada) " Focus + 90% Type here to search O W CO 6 ()) ENG 8:01 AM 2021-01-27Scope and Limitations These criteria outline the common adjustments that DBRS may make to the financial information presented in financial statements to enhance the comparability of certain financial ratios across non-financial corporate issuers. The adjustments described herein may not be applicable in all cases; the considerations outlined in DBRS methodologies are not exhaustive, and the relative importance of any specific consideration can vary by issuer. Further, these criteria are meant to provide guidance regarding the methods DBRS may use and should not be interpreted with formulaic inflexibility but be understood in the context of the dynamic environment in which they are intended to be applied. DBRS Adjustments DBRS may adjust certain accounting information, where the effect is material, to permit better comparability of financial information over time and across issuers and to present financial information that better reflects credit risk fundamentals. The adjustments are typically made for the purpose of calculating Financial Risk Assessment (FRA) metrics, primarily cash flow-to-debt, debt-to- EBITDA as well as EBITDA-to-interest financial ratios, which are among the most important financial ratios used by DBRS to assess the financial risk profile of an issuer (see individual DBRS corporate methodologies for more details). DBRS's adjustments may apply across issuers in all industries or, in some cases, may be industry specific and are not to be interpreted as an opinion on the adequacy of accounting rules or practices. The most common DBRS adjustments to financial information are discussed below. 1. Operating Leases In contrast to capital leases, operating leases are typically off-balance sheet financial obligations, but they are generally undertaken for a similar purpose, namely, securing the use of equipment or property that might otherwise need to be purchased (rather than leased) and financed by means of traditional on-balance sheet debt obligations and/or equity. DBRS typically attempts to translate operating-lease obligations into a debt-equivalent estimate in order to capture the financial impact of operating leases in the calculation of leverage and coverage ratios. This debt equivalent amount is then added to balance sheet debt; in addition, an estimate of interest expense associated with that debt estimate is added to interest expense after adding back the actual lease payment. This approach permits better comparability between issuers that use debt or capital leases to finance assets with those that enter into operating leases. Companies in certain industries, such as merchandising and airlines, are more likely to have a material amount of operating lease obligations. DBRS typically multiplies by six the upcoming year's aggregate operating lease payments to obtain a proxy for the amount of debt represented by operating leases, which is then added to on-balance sheet debt. DBRS may use a lower multiple where the financial exposure is mitigated (e-g., back-to-back leases where the issuer may receive sub-lease income that offsets some or all of its lease obligation). In such situations, the credit risk of the sub-leasing counterparty will be taken into account. For purposes of estimating interest charges relating to such operating leases for interest and fixed-charge purposes, one-third of the upcoming year's lease payments are deemed to be the interest component of the lease payment; this amount is added to interest expense for the purpose of calculating interest coverage ratios, etc. In addition, to complete the adjustment of operating lease obligations into an on-balance sheet debt equivalent amount, annual lease expenses are added back to EBITDA (since this lease payment deduction from EBITDA would not apply given that the lease has been added to on balance sheet debt as described above), and two-thirds of annual expenses (representing the principal portion of lease payments) are added back to operating cash flow. 2. Securitizations of Accounts Receivable While increasingly difficult to achieve, particularly under International Financial Reporting Standards, some companies may still manage to securitize their accounts receivables through off-balance transactions. DBRS views securitizations by non-financial companies as a form of debt financing and will typically add the drawn amount of the securitization program to an issuer's total on-balance sheet debt amount. The assumption is that if the securitization program were to ever unwind, for example, as a result of a breach of a performance trigger, the issuer would likely need to revert to more common on-balance sheet borrowing forms, such as a working capital line of credit, to meet its financing needs. An interest expense amount relating to the debt that is added back to Corporate Finance January 2018DBRS Criteria: Common Adjustments for Calculating Financial Ratios DBRS.COM the balance sheet, using appropriate interest rates, will need to be added to interest expense as well. To the extent a securitization program does not achieve off-balance sheet accounting treatment, no adjustment to the balance sheet debt amount is necessary as the securitization debt will already be included in the on-balance sheet debt amount. Similarly, interest expense associated with the securitization debt will have already been expensed on the income statement. 3. Unusual, Non-Recurring or Extraordinary Items DBRS will generally try to normalize EBITDA, net income and, in certain cases, cash flow from operations by removing the effect of items that are deemed unusual or extraordinary by DBRS, with tax adjustments and consideration of related expenses or revenues, as appropriate. Examples of possible extraordinary gains that, if material, may be adjusted by DBRS could include gains or losses from the sale of assets or from insurance claims while examples of extraordinary expenses could include items such as non-recurring restructuring costs. A reversing adjustment would be made to the appropriate revenue or expense category, as appropriate, to reflect the removal of the extraordinary gain or expense from EBITDA and income, generally. Consideration of the effect on cash flow from operations will also be made. As an example, a one-time restructuring cost deemed to be extraordinary by DBRS will be treated as follows. The restructuring expense amount will be added back to the income statement, thereby reversing the negative effect of the restructuring expense on EBITDA by the same amount. After-tax income will also be increased, but by a lesser amount after giving due consideration for income taxes. When adjusting cash flow from operations, however, not all of the income statement restructuring expense may have reflected cash expenses in the current year, so the add-back of restructuring expense will only be in the amount of the original after- tax cash amount paid by the firm (as presented in the cash flow statement or as reasonably estimated by DBRS). While unusual or extraordinary items are typically one-time in nature, in certain cases, they may continue for several years (such as reorganization costs) and may still require adjustment in the determination of core net income and other financial measures such as EBITDA and EBIT, for example. However, unusual items should not be confused with volatile items. An issuer may have a very unstable revenue source, but if it is part of ongoing operations, it should not be removed from core earnings simply because it is volatile. 4. Interest Expense and Capitalized Development Costs In the calculation of interest- and fixed-charge coverage ratios, DBRS endeavors to capture all interest expense directly attributed to indebtedness and leases. Accordingly, capitalized interest expenses and estimated interest expenses pertaining to operating leases are added back to reported interest expense to reflect the full financial debt servicing burden to the issuer. However, any other expense/income items potentially included by the issuer in interest expense, are generally removed by DBRS. Capitalized development costs, such as those relating to a natural resource project, however, are not typically adjusted from the presentation in audited financial statements. DBRS believes that capitalizing development costs and amortizing them over time provides for a better reconciliation between the costs and revenues pertaining to a given project. 6. Fair Value versus Face Value of Debt The fair value of debt obligations (for issuers that report this way) can, on occasion, differ materially from the face value of debt. Examples of such a situation include issuers that have a very low credit rating (in which case their debt may trade at a deep discount to the face value) or when very long-term debt was issued in a very different interest rate environment from the current interest rate environment. In such cases, DBRS will typically adjust debt reported on a fair value basis, to a face value basis (with any gains or losses reversed on the income statement). The face value, in such cases, is a better reflection of the actual debt obligation of the issuer. 6. Preferred Shares and Hybrid Securities DBRS discusses its approach to rating preferred shares and hybrids and its approach to determining the extent to which hybrid securities will be treated as debt or equity for the purposes of calculating certain financial ratios in its criteria DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers.7. Equity or Cost Investments Investments by one company in another can be accounted for on a cost, equity or consolidated basis. While DBRS typically relies on whatever accounting treatment is used in the issuer's consolidated financial statements, DBRS may adjust the reported financial information if DBRS believes it more appropriately presents the economic relationship between the two entities. While the entire financial statements are not likely to be so adjusted, DBRS may still, nonetheless, make the required adjustments to determine key financial figures (eg, EBITDA, net income and cash flow from operations) on an accounting basis that is appropriate for the situation. A common adjustment to the accounting treatment of subsidiaries is the restatement to an equity basis of the investment of a manufacturer (such as an automotive manufacturer) in its financing subsidiary. Such a subsidiary may be wholly-owned, but a full consolidation of the financing subsidiary's debt may distort the debt amount at the manufacturing operation since leverage for financing companies is typically much higher than that of the parent. In this case, DBRS will restate the debt associated with the financial subsidiary and include, for financial ratio purposes, only the equity of the financing subsidiary on the parent's balance sheet. Notwithstanding a restatement to an equity accounting basis of the financial subsidiary, DBRS will separately monitor the credit and financial risks of the financing subsidiary which in any case are supported by self-liquidating loan receivables. B. Guarantees and Contingent Liabilities If an issuer guarantees the debt of a separate entity, and that debt has not been consolidated on the balance sheet of the guarantor, the guaranteed debt is generally added to the issuer's total debt amount by DBRS when calculating leverage ratios. An exception to this rule is the debt of captive finance subsidiaries of automobile manufacturers, which is typically guaranteed by the rated parent company but is also backed by consumer finance receivables and deemed by DBRS to be economically defeased. Other types of contingent liabilities also have the potential to trigger financial obligations for an issuer. In contrast to debt obligations, however, the timing and amounts due from contingent liabilities (such as lawsuits, reclamations and remediation obligations) are typically subject to considerable uncertainty. Contingent liabilities, therefore, are rarely added to the total debt amount of an issuer by DBRS since there is a strong possibility that the company may be able to greatly reduce or even avoid it. Nonetheless, DBRS assesses the timing and size of any financial obligations arising from contingent liabilities on a case-by-case basis. 9. Pension Plans DBRS typically considers the following in its review of an issuer's pension obligations: (a) jurisdictional issues; (b) the degree of conservatism of assumptions such as the discount rate and projected investment returns; (c) the proximity of the issuer to default (since the implications of unfunded pension obligations may be much larger in a post-default recovery scenario); (d) the size of the plan; (@) any underfunded position relative to the size and cash-generating ability of the company; (f) the firm's financial position, including liquidity and access to capital; and (@) the presence or possibility of any mandatory payments. Generally, DBRS considers the presence of a large underfunded/unfunded pension liability to be a credit negative. DBRS may, with the help of actuarial information, make assumptions about the timing and amount of future pension payments and may also consider the source of cash for such future payments. To the extent additional debt is assumed to be required, adjustments will be made to forecasted debt amounts, interest expense and other financial statement items as appropriate. In a hypothetical default scenario, however, as is assumed in the determination of a recovery rating, particularly using the liquidation valuation approach, certain pension liabilities, depending upon legal and other jurisdictional issues, may be "crystalized" and might become therefore an obligation competing with other creditors of the firm for repayment from whatever assets are assumed to be available at the time. In such cases, such pension obligations would typically be added to general unsecured debt obligations, or, if appropriate for the jurisdiction, they may even rank ahead of secured creditors and may have a material negative effect on the recovery prospects of all creditors