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Fitbit (FIT)/Garmin (GRMN)

Please focus on the Statement of Cash Flows only and perform the following tasks: ? Please answer whether each company uses the direct or indirect method for determining cash flows. Once you have determined the foregoing, please write statement of cash flows for each company using the other method. How does cash flow revenues from operations compare with operating income on the income statements? How do you account for any difference? What are the major sources of operating, financing and investing cash inflows and outflows for each company? How do these influence each company's performance? Is cash flow from operations sufficient to retire debt, cover capital expenditures and pay dividends? What else strikes you as significant about the statements, and why?

? Evaluate the cash flow performance of each company using the analysis framework discussed in your text, Ch5, Section 4.1. ? Please perform common size analysis for both companies as discussed in your text, Ch5, Section 4.2. ? Please compute the free cash flow, cash flow performance and cash flow coverage ratios discussed in your text Ch6, Secs. 4.3-4.4, and the other ratios outlined in Ch6, Sec. 4.4 Please discuss the relationships between the balance sheet, income statement and cash flow statement. How are they connected and otherwise interrelated?All things being equal, which is the most important to an analyst? Why?

Briefly describe the business models for each company selected. What is each company's greatest cash need? How does the way the company does business effect its cash flow position, both negatively and positively? How might it change its business practices to collect and use cash more efficiently?

Exhibit 14 Acme Corporation Common-Size Cash Flow Statement Year Ended December 31, 2018 PANEL A. DIRECT FORMAT FOR CASH FLOW PERCENTAGE OF TOTAL INFLOWS INFLOWS Receipts from customers $23,54 96.86% 3 Sale of equipment 762 3.14 Total $24,30 100.00% 5 PERCENTAGE OF TOTAL OUTFLOWS OUTFLOWS Payments to suppliers $11,90 48.66% 0 Payments to employees 4,113 16.82 Payments for other operating expenses 3,532 14.44 Payments for interest 258 1.05 Payments for income tax 1, 134 4.64 Purchase of equipment 1,300 5.32 Retirement of long-term debt 500 2.04 Retirement of common stock 600 2.45 Dividend payments 1,120 4.58 Total $24,45 100.00% Net increase (decrease) in cash ($152)PANEL B. INDIRECT FORMAT FOR CASH FLOW PERCENTAGE OF TOTAL INFLOWS INFLOWS Net cash provided by operating activities $2,606 77.38% Sale of equipment 762 22.62 Total $3,368 100.00% PERCENTAGE OF TOTAL OUTFLOWS OUTFLOWS Purchase of equipment $1,300 36.93% Retirement of long-term debt 500 14.20 Retirement of common stock 600 17.05 Dividend payments 1, 120 31.82 Total $3,520 100.00% Net increase (decrease) in cash ($152)4.2. Common-Size Analysis of the Statement of Cash Flows In common-size analysis of a company's income statement, each income and expense line item is expressed as a percentage of net revenues (net sales). For the common-size balance sheet, each asset, liability, and equity line item is expressed as a percentage of total assets. For the common-size cash flow statement, there are two alternative approaches. The first approach is to express each line item of cash inflow (outflow) as a percentage of total inflows (outflows) of cash, and the second approach is to express each line item as a percentage of net revenue. Exhibit 14 demonstrates the total cash inflows/total cash outflows method for Acme Corporation. Under this approach, each of the cash inflows is expressed as a percentage of the total cash inflows, whereas each of the cash outflows is expressed as a percentage of the total cash outflows. In Panel A, Acme's common-size statement is based on a cash flow statement using the direct method of presenting operating cash flows. Operating cash inflows and outflows are separately presented on the cash flow statement, and therefore, the common-size cash flow statement shows each of these operating inflows (outflows) as a percentage of total inflows (outflows). In Panel B, Acme's common-size statement is based on a cash flow statement using the indirect method of presenting operating cash flows. When a cash flow statement has been presented using the indirect method, operating cash inflows and outflows are not separately presented; therefore, the common-size cash flow statement shows only the net operating cash flow (net cash provided by or used in operating activities) as a percentage of total inflows or outflows, depending on whether the net amount was a cash inflow or outflow. Because Acme's net operating cash flow is positive, it is shown as a percentage of total inflows.Step 1 Step 2 The major sources of cash for a company can vary with its stage of growth. For a mature company, it is expected and desirable that operating activities be the primary source of cash ows. Over the long term, a company must generate cash from its operating activities. Ifoperatmg cash ow were consistently negative, a company would need to borrow money or issue stock (nancing activities) to fund the shortfall. Eventually, these providers of capital need to be repaid from operations, or they will no longer be willing to provide capital. Cash generated from operating activities can be used in either investing or nancing activities. If the company has good opportunities to grow the business or other investment opportunities, it is desirable to use the cash in investing activities. If the company does not have protable investment opportunities, the cash should be returned to capital providers, a nancing activity. For a new or growth-stage company, operating cash ow may be negative for some period of time as it invests in such assets as inventory and receivables (extending credit to new customers) in order to grow the business. This situation is not sustainable over the long term, so eventually the cash must start to come primarily om operating activities so that capital can be returned to the providers of capital. Lastly, it is desirable that operating cash ows be sufcient to cover capital expenditures (in other words, the company has free cash ow as discussed further in Section 4.3). In summary, major points to consider at this step are: I "What are the major sources and uses of cash ow?I I Is operating cash ow positive and sufcient to cover capital expenditures? Turning to the operating section, the analysts should examine the most signicant determinants of operating cash ow. Companies need cash for use in operations [for example, to hold receivables and inventory and to pay employees and suppliers) and receive cash 'om operating activities [for example, payments 'om customers). Under the indirect method, the increases and decreases in receivables, inventory, payables, and so on can be examined to determine whether the company is using or generating cash in operations and why. It is also useful to compare operating cash ow with net income. For a mature company, because net income includes non-cash expenses (depreciation and amortization), it is expected and desirable that operating cash ow exceed net income. The relationship between net income and operating cash flow is also an indicator of earnings quality. If a company has large net income but poor operating cash ow, it may be a sign of poor earnings quality. The company may be making aggressive accounting choices to increase net income but not be generating cash for its business. You should also examine the variability of both earnings and cash flow and consider the impact of this variability on the company's risk as well as the ability to forecast future cash ows for valuation purposes. In summary: I "What are the major determinants of operating cash ow? I Is operating cash flow higher or lower than net income? Why? I How consistent are operating cash ows? 4. Cash Flow Statement Analysis The analysis of a company's cash ows can provide useful information for understanding a company's business and earnings and for predicting its future cash flows. This section describes tools and techniques for analyzing the statement of cash ows, including the analysis of sources and uses of cash and cash flow, common-size analysis, and calculation of free cash ow measures and cash flow ratios. 4.1. Evaluation of the Sources and Uses of Cash Evaluation of the cash ow statement should involve an overall assessment of the sources and uses of cash between the three main categories as well as an assessment of the main drivers of cash ow within each category, as follows: 1. 2. 3. 4. Evaluate where the major sources and uses of cash ow are between operating, investing, and nancing activities. Evaluate the primary determinants of operating cash flow. Evaluate the primary determinants of investing cash ow. Evaluate the primary determinants of nancing cash ow. Step 3 Within the investing section, you should evaluate each line item. Each line item represents either a source or use of cash. This enables you to understand where the cash is being spent (or received). This section will tell you how much cash is being invested for the future in property, plant, and equipment; how much is used to acquire entire companies; and how much is put aside in liquid investments, such as stocks and bonds. It will also tell you how much cash is being raised by selling these types of assets. Ifthe company is making major capital investments, you should consider where the cash is coming from to cover these investments (e.g., is the cash coming from excess operating cash ow or from the nancing activities described in Step 4}. If assets are being sold, it is important to determine why and to assess the effects on the company. Step 4 Within the nancing section, you should examine each line item to understand whether the company is raising capital or repaying capital, and what the nature of its capital sources are. If the company is borrowing each year, you should consider when repayment may be required. This section will also present dividend payments and repurchases of stock that are alternative means of returning capital to owners. It is important to assess why capital is being raised or repaid