PROPERTIES OF ACCRUAL INCOME, CASH FLOW, AND STOCK …



Income, Cash Flow, and Stock Returns

In this exercise, data for IBM Corporation are analyzed to reveal insights into the properties of three firm-performance measures -- accrual income, operating cash flow, and market return on stock. To begin - open the data series (IBM.xls). In it you will see the following variables:

sales total revenues

ib income before extraordinary items (income from continuing operations)

ncfo net cash flows form operating activities

depn depreciation and amortization expense

p price of IBM's common stock as of its year-end

ret annual return to investors of IBM during the year (%change in price + dividend yield)

Required:

In a new spreadsheet column compute IBM's short-term accruals as follows:

stacc = -(ncfo-ib-depn). For example, in 2000 short term accruals are equal to $3.33 billion. IBM's statement of cash flows is as follows:

Total accruals = 9274-8093 = 1,181.

Short-term accruals (total accruals less depreciation)

= 1,181-4,513 = -3,332

Actually, we should also subtract amortization, but research insight did not break this out in their data base.

The major income items include the gain on sale (-792) and the increase in accounts receivable (-4,720). These are income increasing accruals, so we take the negative to get the right sign on the accruals (cash flow is actually less if we are accruing income).

Create the following variable: stacc/sales

Create a line chart for the stacc series. How have stacc/sales trended over time? What insights do you gain from this analysis?

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