The reason for difference in Net Profit from Operations in the Income Statement and Cash Flow from Operations in Cash Flow Statement is because, both the financial statement follows different accounting principle. While the Net Income of the company is calculated by following accrual basis of accounting, the CFO is calculated by strictly following cash basis of accounting. In other words, if the revenue from a unit sold during December is expected to be received in January, the income statement will record revenue in December itself while no such entry would be posted in Cash flow from Operations. Hence, Income Statement will be overstated with the amount of revenue recorded during the month of December. Thus, CFO’s are always less than Net Income from Operations.(Accounting Coach)
Using a hypothetical example:
18 units@ $10/unit(cash sale)
20 units @9/unit(credit sale)
Other information related to teh companys is as follows:
Cash Purchases made amounting to $250
Operating Expenses paid in cash: $10
Taxes paid: $4
Hence, under Income Statement, the transactions will be recorded as:
However, Cash Flow from Operations will be different from Net Income as it will only consider the cash sales and hence will be lower than the Net income.
Methods of Preparing Cash Flow Statement:
IAS allows two methods for presenting cash flow statement i.e, Direct Method and Indirect Method. Although ending cash flow is same under both the methods, but the main difference lies only in layout of Cash Flow from Operations. The presentation of Cash Flow from Investing Activities and Financing Activities is exactly same under both the methods:
Direct Method:
Direct Method of Cash Flow Statement facilitates conversion of each line item of accrual based income statement into cash receipts and cash expenses. In simple words, this method converts an accrual basis income statement into cash basis income statement as it considers only those payments and revenue that are transacted in nature. The format begins with cash inflow from customers and then deducts the cash outflows for purchases, operating expenses, interest and taxes.
(Robinson, 2011)
Indirect Method:
Unlike Direct Method, Indirect method begins with Net Income which are the then converted into operating cash flow by making adjustments for transactions that affect net income but are not the cash transactions. These adjustment includes eliminating non cash expenses i.e, Depreciation, Amortization etc., Non-Operating Items and changes in working capital balances.
(Robinson, 2011)
Trends in Cash flow from Operations:
Starbucks Inc: Referring to Cash Flow Statement of the company, over the year the CFO of the company has increased to $1750 million recording an increase of 73% during a year. The increase seems consistent and sustainable with the increasing net income of the company, which during 2012 amounted to $1384 Million following an increase of 10.89% since 2011.(Starbucks Inc, 2012)
Dunkin Donuts: The company during the end of 2012, has reported CFO of $154.42 Million which was 5.08% lower than the previous year CFO of $162.70 Million. Although during a year, the net income of the company increased by 214% but the decrease in CFO was attributable to higher depreciation expense other negative changes to net income. This indicates that Dunkin Donuts is aggressively following accrual basis of accounting as there is significant difference in the net income and CFO.
Comparison: Comparing CFO statement of both the companies and the above analysis, it can easily be inferred that Starbucks has sustainable cash flow reporting as Dunkin Donuts which reported 214% increase in net income from 2011 to 2012 has rather decreased CFO by 5% during an year. (Dunkin Donuts, 2012)
Working Capital Management:
WCTR= Net Income/ Working Capital
Working Capital for Starbucks Inc:
2012: 4199-2209= $1990
2011: 3794-2075= $1719
Working Capital for Dunkin Donuts:
2012: 419-353= $66
2011: 406-316= $90
WCTR for Starbucks Inc:
2011: 1248/1719=0.72
2012: 1384/1990= 0.69
WCTR for Dunkin Donuts:
2011: 34/90= 0.38
2012: 108/66= 1.63
Comparison:
Above analysis provides a clear indication that in terms of Working Capital Management, Dunkin Donuts has improved its management of working capital resources significantly during a year. In contrast, Starbucks has a marginally decreasing trend in WCTR.
Trend in Financing Activities:
Starbucks Inc: During the year 2012, the company recorded cash outflow of $745 relating to financing activities, which was 22.50% higher than the previous year cash outflow of $608. The major cash outflow was related to dividends and stock repurchases that amounted to to $513 and $549, respectively. Furthermore, no significant cash inflow was recorded in relation to borrowings, thus, the CFF of the company is sustainable.
Dunkin Donuts: The company during the year 2012, recorded cash outflow of $125.60 Million, which was 317% higher than the previous year cash outflow of $30.071 Million. During the year, company borrowed $380.77 in debt and paid dividend amounting to $70.06 Million.
Comparison:
The CFF of both the companies was a clear indication that Dunkin Donuts is relying high on debt to finance its operations and is more likely to financial distress in the future. Hence, Starbucks Inc is a more solvent company.
Trend in Cash Flow from Investing Activities:
Starbucks Inc: The company reported cash outflow of $974 Million during 2012 relating to investing activities. The CFI of the company was sustainable as the company spent the cash inflow received on maturity of investments and at the same time purchases almost equal amount of investment.
Dunkin Donuts: During 2012, the company reported cash outflow of $22.94 million relating to investing activities, which was 15.85 % higher than the previous year. Unlike Starbucks, the CFI of Dunkin Donuts is more related to capital expenditure which amounted to $22.39 Million during 2012.
Comparing Cash Flow of both the companies:
Referring to above analysis relating to Cash Flow of both the companies, we can conclude that Starbucks Inc is managing its cash flow in a better way. The CFO of the company is in line with Net Income and so does the cash outflow relating to investing and financing activities is much sustainable than Dunkin Donuts.
References:
Thomas Robinson (2011) 'Financial Analysis and Techniques', in CFA Institute (ed.)Financial Reporting and Analysis. Boston: Custom, pp. 140-142.
Thomas Robinson (2011) 'Understanding the Cash Flow Statement', in CFA Institute (ed.) Financial Reporting and Analysis. Boston: Custom, pp. 110-123.
Dunkin Donuts (2012) Annual Report, USA: Dunkin Donuts
Starbucks Inc (2012) Annual Report, USA: Starbucks Inc
Yahoo Finance () Dunkin Donuts: Cash Flow Statement, Available at:http://in.finance.yahoo.com/q/cf?s=DNKN&annual (Accessed: 26th February, 2014)
Accounting Coach () What is the difference between net cash flow and net income?,Available at: http://www.accountingcoach.com/blog/net-cash-flow-net-income(Accessed: 26th February, 2014).
Appendix:
Starbucks Inc Cash Flow Statement:
DUNKIN’ BRANDS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Dunkin Donuts Cash Flow Statement:
