TABLE OF CONTENTS Profit is an opinion. Cash is a fact.
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In the previous chapter, we illustrated the construction of three financial statements for a hypothetical start-up firm: the income statement (IS), balance sheet (BS), and cash flow statement (CFS), according to Generally Accepted Accounting Principles (GAAP). In addition, we constructed the CB statement. We presented an integrated framework for the IS, the CB statement, and the BS with inter-related items from each of the financial statements. It is important to reiterate and stress that we derive the finite cash flows from the financial statements that are not based on ratios.
In this chapter, using two different approaches, we derive the Free Cash Flow (FCF) statement, exclusive of the terminal value (TV), which is relevant for valuation. Later, in Chapter Nine, we include the TV. First, we show a new method for deriving the appropriate cash flows from the CB statement. We hope that most readers agree that it is an easy method. Because the CB is not a common statement, some readers might not be familiar with it and would prefer to derive the excess cash that is invested in marketable securities without constructing the CB statement.
In Appendix A, using the IS and the BS, we show the standard procedure for deriving the excess cash that is invested in marketable securities without constructing the CB statement.
Second, using the standard approach, we derive the cash flows from line items in...
