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Modeling B/S Differences as Cash for Facebook Model

They would tell you in B Schools that Projecting the Cash Flow Statement is Easy – Take the P&L (It has accrual accounting) and remove from it and there! You have the Cash Flow Statement. That is easier said than done.

But indeed if you have modeled it once, you would find that B School professors are right. It is just these two steps. It’s just that the manual to do this is missing in B-Schools. I took you through the first step in the manual yesterday, so let me take you through the second step which is as simple as the first one and get the cash flow statement for Facebook in place.

Balance sheet difference as cash

Just Remember

*The Rows in the chart indicate the impact on Cash

Hint!! Just Remember that Increase in Asset = Decrease in Cash

Then you can easily derive the rest!

Once you have classified the items of Balance Sheet just take the difference of two consecutive years balance of each item and put under the respective head (Operating, Investing & Financing). It should give you the corresponding head of Cash flow Statement.

Important Items to Consider

While taking the differences in the Balance Sheet, it is important to note the following points:

  • We do not consider Cash from Balance Sheet (It’s a Current Asset): This is because we are building the cash flow statement and it would come back as a balancing figure
  • Difference in Retained Earnings is not really investing: That would usually be the figure that you would get from Profit After Tax (PAT). Sometimes it is easy to project (as in the cash of Facebook) and sometimes you need to do a bit of Maths.

Indirect Method

So to calculate the Cash from operating activity, we start from Net Income (which would be like taking the difference of Retained Earnings) and adjust non-cash charges, non-operating items and changes in working capital (a balance sheet item).

Generally, any item that would be classified on the balance sheet as a long-term asset would be a candidate for classification as an investing activity and any item that would be classified on the balance sheet as either a long-term liability or equity would be a candidate for classification as a financing activity.

Cash Flow Statement for Facebook

We just take the difference in the historical Balance Sheet of Facebook and then adjust for the numbers from the P&L

Next Steps

Now our Cash Flow Statement is almost in place. We just need to make a few more adjustments and calculations and we are done with the Cash Flow Statement. In the next tutorial, we will learn how to calculate the closing cash balance and understand how it is linked with the B/S.

My experience tells me that, Preparation of Cash Flow Statement is like a Giant Step in your Modeling Career. Getting it right in the initial part of modeling career is a real high. I do hope that you are enjoying this process fully!


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