I want to discuss the concept of cash flow from a corporate finance perspective uh in a previous tutorial I presented a brief discussion of the statement of cash flows which is an important piece of financial information but that's not really what we're interested in here in corporate finance we're interested in the cash that's generated from utilizing assets and how it's paid to those who finance the asset purchase so we're looking at shareholders we're looking at Bond holders we're looking at operating income so there are a couple of formulas here let's see if we can um look at these cash flow from assets they couple of ways to compute this one way to compute It Is by looking at it as the as operating cash flow minus net capital spending so that would be spending on plant and Equipment minus changes in networking Capital networking Capital being investments in inventory um investments in accounts receivable Etc you can also calculate it by looking at the cash flow to creditors plus the cash flow to stockholders so it's probably easiest if we just look at an example here and and here we have an example from uh one of the textbooks I've been using and we have a balance sheet and we have an income statement and if we look at the first approach cash flow from assets operating cash flow minus net capital spending minus the change in net working capital operating cash flow is earnings before interest in taxes plus depreciation minus taxes now you might be asking yourselves why do we add depreciation back well we add depreciation in because depreciation is a non-cash expense depreciation needs to be in the calculation if you look over here at the income statement you'll see that we've subtracted out depreciation before we computed earnings before interest in taxes now you might think well why subtract it out if you're just going to add it back in well depreciation does affect cash flow because it affects the taxes that are paid you can deduct depreciation expense that lowers your tax that has an effect on cash flow but because you don't actually pay out depreciation you don't the $10,000 in depreciation you take is not actually paid anywhere it's just used to reduce your taxable income we need to add it back in so let's see what we have here if we go to this if we follow our um formula here ebit is 694 depreciation is 65 and taxes are 22 okay tax expense is a real expense you actually it does affect cash flow you actually write a check to the government so if we do that calculation we have operating cash flow of $547 now how about the change in capital spending well it's going to be the ending net fixed assets minus the beginning net fixed assets okay so you have a certain amount of fixed assets at the end of the period you subtract out what you had at the beginning of the period and you add back in depreciation so we can go over here to the balance sheet and we can see that they ended in 2010 with $179 of uh fixed assets they had $1,644 in 2009 so we subtract that and then we add back in the $65 in depreciation so that tells us how much we spent on capital or fixed assets and then we also want to look at the change in working capital networking Capital so what do we do here let's take a look at our ending networking Capital so we we go over here and we can see that we have current assets okay net working capital was current assets minus current liabilities and over here our current assets are 1403 minus 389 which our current liabilities are so that's our ending networking Capital 2010 current assets minus 2010 current liabilities gives us our ending net working capital and then similarly in 2009 we had $1,112 in current assets and we subtract out the 2009 current liabilities of 4 28 so that gives us our beginning net working capital and you subtract one from the other and you get 330 and so you go to this formula operating cash flow minus net capital spending minus change in net working capital so you get 547 minus 130 minus 330 and you get 87 and again it makes sense this is money that's coming in and we subtract out the money that was spent on Capital expenditures and we subtract out the money that was sent spent on changes and working capital okay let's look at the other formula here we can use the formula cash flow from creditors plus cash flow from shareholders cash flow from creditors is interest paid minus any net new borrowing so if we go to the income statement we can see that we spent 70 and our net new borrowing we go to the balance sheet and we look at the change in debt in 2010 we have 454 in 2009 we have 48 so 454 - 408 is 4 is uh 46 so 70 - 46 is is 24 so that's our cash flow uh from creditors our cash flow to shareholders dividends paid again we can go over to the income statement Dividends are 103 any net new Equity again go back to the balance sheet and we can see that paid in Surplus under owner's equity here is 640 common stock and paid in Surplus is 640 it was previously 600 so you added 40 to that so 103 minus 40 is 63 add the two together and you get 87 so again notice that we get the same number whether we use the first Formula or we use the second formula and you should get the same the same answer okay they come from the same place they're derived uh similarly okay nice little table to summarize this is that cash flow from assets equals cash flow to creditors uh plus cash flow to stockholders okay that's what we just did that was the second formula we applied the first Formula we applied operating cash flow minus net capital spending minus the change in net working capital and you can see the definitions of operating cash flow net capital spending change in working capital Etc so one good check is to do it both ways to make sure you get the same solution in when we start to look at project analysis Capital budgeting often times we will use these concepts of cash flow in order to DET determine the cash flow from a project that we're evaluating and then we'll apply tools like net present value or internal rate of return to evaluate those projects