ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos

Principles of Finance: Unit 3, Cash Flow From Operations 2 Views


Share It!


Description:

Let's take a look at Mattel's cash flow from operating activities and see what's what. We'll warn you - it's accrual, cruel world.

Language:
English Language

Transcript

00:00

Principles of finance ah la shmoop cash flow from operations

00:05

All right let's do this thing Mattel Here are the

00:08

filings were looking at the june thirty two thousand sixteen

00:10

cash flows from operations line and we note that company

00:13

at a loss of net income of about ninety two

00:15

million dollars Ouch Things not going so well there with

00:19

barbie Well but that's it counting on an accrual basis

00:23

And of course we have an opus eleven hour video

00:26

explaining the deets of accrual accounting Check out all of

00:29

it if you will have no life Okay so we're

00:31

looking at mattel from a cash flow perspective and maybe

00:35

from that perspective or bases or foundation will find that

00:39

mattel is more like cap cities a hidden gem producing

00:44

actual tons of free cash All right so the next

00:47

line is depreciation They'd appreciate a hundred nineteen million dollars

00:50

in the six month period there And don't get confused

00:53

when some companies produce these lines quarterly It seems like

00:56

a lot Annualized That'd be almost a quarter billion dollars

00:59

a year of depreciation Was the plastic stamping factory getting

01:03

old Well maybe it was That license is paid to

01:06

Miley or kanye or boomer for their doll lookalikes may

01:10

be the key difference remember between amortization and depreciation is

01:14

that amortization is used for intangible assets like licenses and

01:18

patents while depreciation is used for tangible ones Was it

01:22

the book value of the brands they acquired years ago

01:26

And that now aren't worth much Well No If that

01:28

were the case it would go in the financing section

01:31

lower sea they're tricky but note that the depreciation line

01:35

is positive The net income loss of ninety two million

01:38

dollars was negative See the parentheses there around it Well

01:42

why is depreciation positive here Well because we're trying to

01:45

calculate cash earnings from operations in a cruel accounting you

01:50

take into account depreciation but in cash accounting wealth appreciation

01:54

is kind of phantom so since we subtracted it from

01:57

the cruel world to get r ninety two million dollars

02:00

in net income losses you have to add it back

02:03

now in the cash accounting part that we're doing confusing

02:06

Yes well hang in there we're confused to next line

02:08

is amortization and just like depreciation we're gonna add back

02:11

almost thirteen million bucks over that six month period just

02:15

a za total sidebar here and not for anything other

02:17

than your prurient pleasure Note that our accounting loss of

02:20

ninety two million bucks is fully negated by are just

02:23

adding back dna here that is we have negative ninety

02:26

two plus hundred nineteen plus their teen equals forty and

02:29

that's forty million dollars of cash flow production Well why

02:32

does that matter Well lot of wall street people quote

02:34

earnings results as one form or another of ebitda earnings

02:38

before interest taxes depreciation and amortization Just worth noting so

02:41

noted Move on deferred income taxes air Next we owe

02:45

taxes We differed paying them They consumed sixty million dollars

02:49

of cash in the six month period Likely meaning that

02:52

we had a debt obligation of taxes which we had

02:54

to pay off in this period And that consumed cash

02:58

Alright next is share based compensation Okay We paid our

03:01

top execs with stock and options Why Well we want

03:05

them to behave as owner managers rather than just employees

03:09

If they own a chunk of the company hopefully they'll

03:12

act in the long term Best interest of the company

03:14

as owners not just people taking a paycheck and running

03:18

So we pay them with cash and stock but stock

03:20

isn't free It has to be accounted for on an

03:23

accrual basis Stock is usually evaluated at some average price

03:27

for where the shares were trading around when they were

03:29

granted There's long formula for all this that's totally not

03:33

worth covering in this course so we'll just move on

03:35

from it is paying in stock the same his cash

03:37

No So you have to add back the value of

03:40

that stock compensation by adding back the cash amount that

03:44

was notionally deducted on an accrual basis for paying for

03:47

it all right Next up onto net change in assets

03:51

and liabilities Ooh this is a complex one Well let's

03:54

start with the super basic concept Recall the deal with

03:57

the super bowl and our friendly little lemonade stand a

03:59

while ago Our balance sheet change dramatically after we got

04:03

paid by the nfl for providing lemonade for the super

04:06

bowl Right We had a mountain of cash come in

04:09

courtesy of the kindly loving people of the nfl and

04:12

we paid off our debts Grandma in the cup vendor

04:15

in the five k visa card and costco over sugar

04:18

And lemons and all that Well this event generated a

04:20

ton of cash and a bunch of other things changed

04:22

A cz Well the biggest changes was that archy inventory

04:25

went down to the well basically nothing And in the

04:27

case of the lemonade company inventory zehr generally really cheap

04:31

They represent only a small fraction of the cost of

04:34

goods sold like fifteen percent or fifteen cents A cop

04:37

for you no sugar and lemons on a one dollars

04:40

a cup sail but repurposed last it's hello barbie are

04:44

very different The plastic expires or melts or gets damaged

04:49

in transit And some kids just cry and cry and

04:51

cry And mommy takes ken back to the store for

04:54

a refund so mattel could be gearing up for a

04:56

huge new foray into swimming plastic doll with a big

05:00

michael phelps campaign He floats along with hope and they

05:04

spend a hundred million dollars in cash producing ten million

05:07

michael phelps stalls ready to sell them at twenty bucks

05:09

a pop this summer Well that event of stocking up

05:11

in inventory consumed a ton of cash It was a

05:14

negative to cash production even though you now have this

05:17

Little army of bendable michael's which by the way you

05:20

plan to sell it double the price for which you

05:23

produce them You hope they sell anyway but during that

05:25

period of stocking up it was really bad for your

05:28

cash flow But what if you didn't have to Hey

05:31

your plastic vendors right away And what if the little

05:34

impede on the doll could wait to be paid for

05:37

five months Well you promised to pay whether the dolls

05:41

sell or not You owe the money eventually but in

05:44

greenlighting all of that work you've accumulated a huge change

05:48

in your accounts payable in this period and you haven't

05:52

gotten a diamond cash from selling michael's yet so you

05:55

need capital that just works for you for some period

05:58

of time until you can monetize michael this summer when

06:01

the whether it's hot kids want him to swim alongside

06:04

them in the pool before he melts into the deck

06:06

and you sell the parents of the crying kid another

06:09

doll very high margin hot decks in the summer you're

06:11

praying for another scorcher So for starters note the ad

06:15

back of three hundred fifty one million dollars in accounts

06:17

Receivable here Att mattel That means that mattel collected in

06:20

cash two hundred fifty one million dollars in a r

06:23

or accounts receivable This would be from places like walmart

06:26

amazon target while they're still alive and the other places

06:30

mattel sells its wares but it also grew inventory See

06:34

the two hundred eighty nine million dollars in cash cost

06:36

to build inventories and that's a lot Maybe they really

06:39

are doing a michael swimmer doll Finally note the mishmash

06:43

of accounts payable accrued liabilities and income tax is payable

06:46

all in one line Why would they jam them all

06:49

into one line They're well Paper is cheap And computer

06:52

server disk space is pretty much free in the cloud

06:55

these days So why jam him in Why not break

06:57

them out Well the answer is that the numbers were

07:00

probably really ugly Look how much was burned in there

07:03

in cash Three hundred eleven million dollars We're going to

07:07

skip other for now And just look at the bottom

07:09

line for cash from operations for mattel Yet they burned

07:12

over two hundred forty million dollars for operating company for

07:15

six months This is a company in trouble People go

07:19

Type in ticker m eighty on a stock quote thing

07:22

and you'll get that whole ugly story were it not

07:24

for this company paying a huge fat dividend It'd be

07:27

a really low price stock And you can only imagine

07:29

what had happened if they ever cut their dividend groups

07:32

They did later and here's what happened So what we

07:35

thought was bad enough with the ninety million dollars accrual

07:38

accounting loss when we uncover the cash from operations line

07:41

and find a loss of two hundred forty million dollars

07:43

it's even worse Ug in the back Your mind however

07:46

you should be thinking this is a toy company When

07:50

do most toys get sold Oh yeah Christmas that it

07:54

be December is december reflected in the january one to

07:58

june thirty time frame No So maybe things will be

08:02

better in the back half of the year That's not

08:04

our mission here We just went through cash flows from

08:06

operations which is the first of three parts of cash

08:10

flows So before we go let's do a quick review

08:12

of the math of accounts receivable in accounts payable Let's

08:15

just tweak the superbowl lemonade delivery slightly What if the

08:18

nfl had said we'll pay you after you deliver the

08:21

hundred thousand cups of lemonade according to the following formula

08:25

you get fifty thousand dollars the day after the super

08:28

bowl and then you get fifty thousand dollars three months

08:30

later because we want to be sure nobody sues us

08:33

for lousy lemonade that ruined they're doing all right Well

08:36

we of course say yes because well they are the

08:38

nfl which stands for no freaking lawyers How would the

08:42

numbers then look on our income statement next quarter in

08:45

the following quarter Well we'd recognize the cash paid this

08:48

quarter but would recognize all a hundred grand of the

08:51

revenues like aren't the odds really high The nfl will

08:55

hey yes yes but we don't get the revenues for

08:57

three months so best practices gap accounting would make a

09:00

note of that either we would not recognize the revenues

09:03

until next quarter or without a line for deferred revenue

09:06

so we're recognizing them light that way once they become

09:10

full fledged revenues next quarter fifty grand will evaporate from

09:13

our deferred revenues line and our accounts receivable line and

09:17

fifty grand will then go into our revenues line while

09:20

the same works in the other direction We're going to

09:22

throw a bunch of these computations your way as we

09:24

work through the course So if you don't get all 00:09:26.523 --> [endTime] this right away don't sweat it Just keep plugging

Up Next

GED Social Studies 1.1 Civics and Government
39794 Views

GED Social Studies 1.1 Civics and Government

Related Videos

Fake News
11938 Views

How do you tell fake news from real news?

Finance: What is Bankruptcy?
260 Views

What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...

Finance: What is a Dividend?
1777 Views

What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...

Finance: How Are Risks and Rewards Related?
589 Views

How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...