Cash Flow Analysis

Chapter 7

Cash Flow Analysis

Cash is the residual of cash inflows less cash outflows for all prior periods of a company. Net cash flows, or simply cash flows, refer to the current period's cash inflows less cash outflows. Cash flows are different from accrual measures of performance. Cash flow measures recognize inflows when cash is received not necessarily earned, and outflows when cash is paid not necessarily incurred. The statement of cash flows reports cash flow measures for three primary business activities: operating, investing, and financing. Operating cash flows, or cash flows from operations, is the cash basis counterpart to accrual net income. Information on cash flows helps us assess a company's ability to meet obligations, pay dividends, increase capacity, and raise financing. It also helps us assess the quality of earnings and the dependence of income on estimates and assumptions regarding future cash flows.  This chapter describes cash flows and their relevance to our analysis of financial statements. We describe current reporting requirements and their implications for our analysis of cash flows. We explain useful analytical adjustments to cash flows using financial data to improve our analysis. We direct special attention to transaction reconstruction, T-account, and conversion analyses.

Statement of Cash Flows Relevance of Cash Reporting by Activities Constructing the Cash Flow Statement Special Topics Reporting Cash Flows from Operations Indirect Method Direct Method Converting from Indirect to Direct Method Adjustments to Cash Flow Components Additional Disclosures and Adjustments Analysis Implications of Cash Flows Limitations in Cash Flow Reporting Interpreting Cash Flows and Net Income Alternative Cash Flow Measures Company and Economic Conditions Free Cash Flow Cash Flows as Validators Specialized Cash Flow Ratios            Cash Flow Adequacy Ratio            Cash Reinvestment Ratio Appendix 7A Analytical Cash Flow Worksheets

Explain the relevance of cash flows in analyzing business activities. Describe reporting of cash flows by business activities. Describe the preparation and analysis of the statement of cash flows. Interpret cash flows from operating activities. Analyze cash flows under alternative company and business conditions. Describe alternative measures of cash flows and their usefulness. Illustrate an analytical tool in evaluating cash flows (Appendix 7A).

• The term cash flow was probably first coined by analysts. They recognized that the accrual system of income measurement permits the introduction of a variety of alternative accounting treatments and consequent distortions. The crude concept of cash flow—net income plus major noncash expenses (such as depreciation)—was derived to bypass these distortions and bring income measurement closer to the discipline of actual cash flows. This cash flow measure, still a popular surrogate for cash from operations (CFO), is crude because it falls short of reliably approximating in most cases the correct measure of CFO.

Confusion with the term cash flow derives from several sources. One source of confusion stems from the initial and incorrect computation of the crude measure of cash flow as income plus major noncash expenses. The figure fails to reflect actual cash flows. Another and more serious confusion arises from the assertion by some, and particularly by managers dissatisfied by the level of their reported net income, that cash flow is a measure of performance superior to or more valid than net income. This assertion implicitly assumes that depreciation, and other noncash costs, are not genuine expenses. Experience shows that only net income is properly regarded as a measure of performance and can be related to the equity investment as an indicator of operating performance. If we add back depreciation to net income and compute the resulting return on investment, we are, in effect, confusing the return on investment with an element of return on investment in fixed assets.

2.  While fragmentary information on the sources and uses of cash can be obtained from comparative balance sheets and from income statements, a comprehensive picture of this important area of activity can be gained only from a statement of cash flows (SCF). The SCF provides information to help answer questions such as:

• What amount of cash is generated by operations?
• What utilization is made of cash provided by operations?
• What is the source of cash invested in new plant and equipment?
• What use is made of cash from a new bond issue or the issuance of common stock?
• How is it possible to continue the regular dividend in the face of an operating loss?
• How is debt repayment achieved?
• What is the source of cash used to redeem the preferred stock?
• How is the increase in investments financed?
• Why, despite record profits, is the cash position lower than last year?

• SFAS 95 requires that the statement of cash flows classify cash receipts and cash payments by operating, financing and investing activities.

Operating activities encompass all the earning‑related activities of the enterprise. They encompass, in addition to all the income and expense items found on the income statement, all the net inflows and outflows of cash that operations impose on the enterprise. Such operations include activities such as the extension of credit to customers, investment in inventories, and obtaining credit from suppliers. This means operating activities relate to all items in the statement of income (with minor exceptions) as well as to balance sheet items that relate to operations  mostly working capital accounts such as accounts receivable, inventories, prepayments, accounts payable, and

accruals. SFAS 95 also specifies that operating activities include all transactions and events that are not of an investing or financing nature.

Financing activities include obtaining resources from owners and providing them with a return of or a return on (dividends) their investment. They also include obtaining resources from creditors and repaying the amounts borrowed or otherwise settling the obligations.

Investing activities include acquiring and selling or otherwise disposing of both securities that are not cash equivalents and productive assets that are expected to generate revenues over the long‑term. They also include lending money and collecting on such loans.

4.   We can distinguish among three categories of adjustments that convert accrual basis net income to cash from operations: (i) Expenses, losses, revenues, and gains that do not use or generate cash such as those involving noncash accounts (except those in ii), (ii) Net changes in noncash accounts (mostly in the operating working capital group) that relate to operations—these modify the accrual‑based revenue and expense items included in income, (iii) Gains and losses (such as on sales of assets) that are transferred to other sections of the SCF so as to show the entire cash proceeds of the sale.

5.   The two methods of reporting cash flow from operations are:

      Indirect Method: Under this method net income is adjusted for noncash items required to convert it to CFO. The advantage of this method is that it is a reconciliation that discloses the differences between net income and CFO. Some analysts estimate future cash flows by first estimating future income levels and then adjusting these for leads and lags between income and CFO (that is, noncash adjustments).

      Direct (or Inflow‑Outflow) Method: This method lists the gross cash receipts and disbursements related to operations. Most respondents to the Exposure Draft that preceded SFAS 95 preferred this method because this presentation discloses the total amount of cash that flows into the enterprise and out of the enterprise due to operations. This gives analysts a better measure of the size of cash inflows and outflows over which management has some degree of discretion. As the risks that lenders are exposed to relate more to fluctuations in CFO than to fluctuations in net income, information on the amounts of operating cash receipts and payments is important in assessing the nature of those fluctuations.

6.   The function of the income statement is to measure the profitability of the enterprise for a given period. This is done by matching expenses and losses with the revenues and gains earned. While no other statement measures profitability as well as the income statement, it does not show the timing of cash flows and the effect of operations on liquidity and solvency. The latter is reported on by the SCF. Cash from operations (CFO) reflects a broader concept of operations relative to net income. It encompasses all earning‑related activities of the enterprise. CFO is concerned not only with expenses and revenues but also with the cash demands of these activities, such as investments in customer receivables and in inventories as well as the financing provided by suppliers of goods and services. CFO focuses on the liquidity aspect of operations and is not a measure of profitability because it does not include important costs such as the use of long‑lived assets in operations or important revenues such as the equity in the earnings of nonconsolidated subsidiaries or affiliates.

7.   The SCF sheds light on (i) the effects of earning activities on cash resources, (ii) what assets are acquired, and (iii) how assets are financed. It also can highlight more clearly the distinction between net income and cash provided by operations. The ability of an enterprise to generate cash from operations on a consistent basis is an important indicator of financial health. No business can survive over the long run without generating cash from its operations. However, the interpretation of CFO figures and trends must be made with care and with a full understanding of all surrounding circumstances.

Prosperous as well as failing entities can find themselves unable to generate cash from operations at any given time, but for different reasons. The entity caught in the "prosperity squeeze" of having to invest its cash in receivables and inventories to meet ever‑increasing customer demand will often find that its profitability will facilitate financing by equity as well as by debt. That same profitability should ultimately turn CFO into a positive figure. The unsuccessful firm, on the other hand, will find its cash drained by slowdowns in receivable and inventory turnovers, by operating losses, or by a combination of these factors. These conditions usually contain the seeds of further losses and cash drains and also can lead to difficulties in obtaining trade credit. In such cases, a lack of CFO has different implications. The unsuccessful or financially pressed firm can increase its CFO by reducing accounts receivable and inventories, but usually this is done at the expense of services to customers that can further depress future profitability. Even if the unsuccessful firm manages to borrow, the costs of borrowing only magnify the ultimate drains of its cash. Thus, profitability is a key consideration, and while it does not insure CFO in the short run, it is essential to a healthy financial condition in the long run.

Changes in operating working capital items must be similarly interpreted in light of attending circumstances. An increase in receivables can mean expanding consumer demand for enterprise products or it can mean an inability to collect amounts due in a timely fashion. Similarly, an increase in inventories (and particularly of the raw material component) can imply preparations for an increase in production in response to consumer demand. It also can imply (particularly if the finished goods component of inventories is increasing) an inability to sell due to, say, when anticipated demand did not materialize.

8.   A valuable analytical derivative of the SCF is "free cash flow." As with any other analytical measure, analysts must pay careful attention to components of this computation. Here, as in the case of any cash flow measures, ulterior motives may sometimes affect the validity of the computation. One of the analytically most useful computations of free cash flow is:
  Cash from Operations (CFO)
- Capital expenditures required to maintain productive capacity used in generating income 
  - Dividends (on preferred stock and maintenance of desired payout on common stock)
  =  Free Cash Flow (FCF)

Positive FCF implies that this is the amount available for company purposes after provisions for financing outlays and expenditures to maintain productive capacity at current levels. Internal growth and financial flexibility depend on an adequate amount of FCF.  Note that the amount of capital expenditures needed to maintain productive capacity at current levels is generally not disclosed by companies. It is included in total capital expenditures, which also can include outlays for expansion of productive capacity. Breaking down capital expenditures between these two components is difficult. The FASB considered this issue, but in SFAS 95 it decided not to require classification of investment expenditures into maintenance and expansion categories.

 

9.   For financial statement analysis, the SCF provides clues to important matters such as:

• Feasibility of financing capital expenditures and possible sources of such financing.
• Sources of cash to finance an expansion in the business.
• Dependence of the firm on external sources of financing (such as debt or equity).
• Future dividend policies.
• Ability to meet future debt service requirements.
• Financial flexibility, that is, the firm's ability to generate sufficient cash so as to respond to unanticipated needs and opportunities.
• Insight into the financial habits of management and indications of future policies.
• Signals regarding the quality of earnings.

Exercise 7-1 (20 minutes)

The Year 11 CFO of Campbell is higher (by $403.7 million) than its Year 11 net income for two main reasons:
1.   Some items decreased net income but did not use cash—specifically:
a.   Depreciation and amortization are expenses not requiring a cash outlay ($208.6).
b.   Deferred income taxes are an expense that has no present cash payment ($35.5).
c.   Several charges and expenses did not require outlays of cash ($63.2).
d.   A decrease in inventory implies that cost of sales are charged by reducing inventory levels rather than by making cash payments of $48.7.

2.   Some items generated operating cash inflow did not enter into the determination of net income—specifically:
a.   The decrease in accounts receivable means that cash is collected beyond the amounts recognized as sales revenue in the income statement ($17.1).
b.   There are several other items that had a similar effect, amounting to $30.6.

Exercise 7-2 (40 minutes)

a.   SFAS 95 requires that the SCF classify cash receipts and payments by operating, financing, and investing activities.
(1) Operating activities encompass all the earning‑related activities of the enterprise. They encompass, in addition to all the income and expense items found on the income statement, all the net inflows and outflows of cash that operations impose on the enterprise. Such operations include activities such as the extension of credit to customers, investment in inventories, and obtaining credit from suppliers. This means operating activities relate to all items in the statement of income (with minor exceptions) as well as to balance sheet items that relate to operations  mostly working capital accounts such as accounts receivable, inventories, prepayments, accounts payable, and accruals. SFAS 95 also specifies that operating activities include all transactions and events that are not of an investing or financing nature.
(2) Financing activities include obtaining resources from owners and providing them with a return of or a return on (dividends) their investment. They also include obtaining resources from creditors and repaying the amounts borrowed or otherwise settling the obligations.
(3) Investing activities include acquiring and selling or otherwise disposing of both securities that are not cash equivalents and productive assets that are expected to generate revenues over the long‑term. They also include lending money and collecting on such loans.

Exercise 7-2—concluded

b.   SFAS 95 requires that all significant financing and investing activities be disclosed. For example, noncash transactions that include the conversion of debt to equity, the acquisition of assets through the issuance of debt, and exchanges of assets or liabilities, should be disclosed in a separate schedule of noncash investing and financing activities.

c.   (1) Net income is the starting point of the computation of CFO. SFAS 95 does not require the separate disclosure of extraordinary items in the SCF.
      (2) Depreciation is added back as an expense not requiring cash.
      (3) The write‑off of uncollectible receivables does not affect cash. Similarly, the bad debt expense does not require an outlay of cash. Since this corporation uses the indirect method for presentation of CFO, no additional adjustment is needed beyond the adjustment for the change in the net accounts receivable, which includes the credit to the allowance for doubtful accounts.
      (4) The $140,000 increase in accounts receivable means that some sales have not been collected in cash and, accordingly, net income is reduced by $140,000 in arriving at CFO.  The $60,000 decline in inventories means that cost of goods sold includes inventories paid for in prior years, and did not require cash this year. As such, net income is increased by $60,000 in arriving at CFO.
      (5) This $380,000 is an expense requiring cash—no adjustment is called for. This amount also must be disclosed as part of the supplemental disclosures.
(6) A reconstructed analytical entry would appear as:
      Cash...................................................                   30,000
            Accumulated Depreciation..........                   50,000

            PPE.....................................................                                           75,000

            Gain on sale of machine..............                                            5,000
The $30,000 increase in cash is shown as a source from investing activities. The $5,000 gain is deducted from (removed from) net income so that the entire proceeds of the sale are shown as part of investment activities.
      (7) Only the cash payment of $100,000 is shown in the SCF as an investing activity outflow. In a separate schedule, the purchase of buildings and land for noncash considerations is detailed.
      (8) This is a noncash transaction that is disclosed in a separate schedule of noncash investing and financing activities.
      (9) The declaration of a cash dividend creates a current liability. During Year 8, no cash outflow occurs and there is nothing to report on the Year 8 SCF.
     (10) This event has no effect on cash nor need it be reported in conjunction with the SCF.

Exercise 7-3 (30 minutes)

• Cash Flows from Operations Computation:

      Net income...........................................................................                                      $10,000 
Add (deduct) items to convert to cash basis:
Depreciation, depletion, and amortization.............             $8,000 
Deferred income taxes.................................................          400 
Amortization of bond discount..................................            50 
Increase in accounts payable....................................              1,200
Decrease in inventories...............................................          850                      10,500 
$20,500 
Undistributed earnings of unconsolidated 
subsidiaries and affiliates..........................................          (200)
Amortization of premium on bonds payable..........            (60) 
Increase in accounts receivable................................         (900)                      (1,160) 
Cash provided by operations ........................................                                      $19,340

b.   (1) The issuance of treasury stock for employee stock plans (as compensation) requires an addback to net income because it is an expense not using cash.

      (2) The cash outflow for interest is not included in expense and must be included as cash outflow in investing activities (as part of outlays for property.)

      (3) If the difference between pension expense and actual funding is an accrued liability, the unpaid portion must be added back to income as an expense not requiring cash. If the amount funded exceeds pension expense, then net income must be reduced by that excess amount.

Exercise 7-4 (30 minutes)

a.   Beginning balance of accounts receivable.........                    $   305,000
Net sales....................................................   1,937,000
Total potential receipts.............................................                            $2,242,000
Ending balance of accounts receivable...............                      -  295,000
Cash collected from sales........................................                            $1,947,000

b.   Ending balance of inventory...................................                    $   549,000
Cost of sales................................................................                            +1,150,000
Total........................................................... $1,699,000
Beginning balance of inventory.............................                     -   431,000
Purchases.....................................................................                            $1,268,000
Beginning balance of accounts payable..............                    $   563,000
Purchases (from above)...........................................                              1,268,000
Total potential payments..........................................                            $1,831,000
Ending balance of accounts payable....................                     -   604,000
Cash payments for accounts payable..................                            $1,227,000

c.   Issuance of common stock......................................                    $     81,000
Issuance of treasury stock.......................................                           17,000
Total nonoperating cash receipts..........................                    $     98,000

d.   Increase in land...........................................................                    $   150,000
Increase in plant and equipment............................                           18,000
Total payments for noncurrent assets.................                    $   168,000

Exercise 7-5 (20 minutes)

a.                                                          X                              X                                 O
b.                                                          X                                                                  F
c.                        X                                                                                                     F
d.                        X                                                                                                     I
e.                                                          X                                                                  F
f.                                                                                                                                NCN
g.                                                          X                                                                  I
h.                                                                                                                               NCS
i.                                                            X                                                                  F

Exercise 7-6 (20 minutes)

a.                        X                                                                 X                                 O
b.                                                          X                                                                  F
c.                                                                                                                               NCN
d.                                                          X                                                                  I
e.                                                                                                                               NCS
f.                                                                                                                                NCN
g.                        X                                                                                                     I
h.                                                                                                                               NCS
i.                                                                                                                                 NE

 

 

Exercise 7-7 (30 minutes)

   1.   NE           NE                                               +
   2.   NE           NE                                               +
   3.   +               +                                                  +
4a.   -                NE                                               NE
4b.   NE(1)        +(2)                                               +(2)                                            
4c.   -                +(2)                                               +(2)                                            
   5.   NE           +                                                  +
   6.   -                + (long-run -)                            + (long-run -)
   7.   -                -(5)                                                +
   8.   +               NE                                               NE
   9.   +(3)           +(4)                                               +(4)                                            
10.                   NE                                               +                                              +
11.                  +                                                   +                                              +
12.                   NE                                               NE                                           +

(1) Deferred tax accounting.
(2) Depends on whether tax savings are realized in cash.
(3) If profitable.
(4)  If accounts receivable collected.
(5) Depends on whether interest is paid or accrued.

      Further explanations (listed by proposal number):
1.   Substituting payment in stock for payment in cash for its dividends will not affect income or CFO but will increase cash position.
2.   In the short run, postponement of capital expenditures will save cash but have no effect on income or CFO. In the long term, both income and CFO may suffer due to lower operating efficiency.

Exercise 7-7—continued

3.   Cash not spent on repair and maintenance will increase all three measures. However, the skimping on necessary discretionary costs will adversely impact future operating efficiency and, hence, profitability.
4.   Managers advocating an increase in depreciation may have spoken in the mistaken belief that depreciation is a source of cash and that consequently increasing it would result in a higher cash inflow. In fact, the level of depreciation expense has no effect on cash flow—the same amount of depreciation deducted in arriving at net income is added back in arriving at CFO.  On the other hand, increasing depreciation for tax purposes will in all cases result in at least a short‑term savings.
5.   Quicker collections will not affect income but will increase CFO because of lower accounts receivable. Cash will also increase by the speedier conversion of receivables into cash. In the longer run this stiffening in the terms of sale to customers may result in sales lost to competition.
6.   Payments stretched‑out will lower income because of lost discounts but does positively affect CFO by increasing the level of accounts payable. Cash conservation will result in a higher cash position. Relations with suppliers may be affected adversely. Note: Long-term cash outflow will be higher because of the lost discount.
7.   Borrowing will result in interest costs that will decrease income and CFO. Cash position will increase.
8.   This change in depreciation method will increase income in the early stages of an asset's life. The opposite may hold true in the later stages of the asset's life.

• In the short term, higher sales to dealers will result in higher profits (assuming we sell above costs) and, if they pay promptly, both CFO and cash will increase. However, unless the dealers are able to sell to consumers, such sales will be made at the expense of future sales.
• This will lead to less income from pension assets in the future which could cause future pension expense to increase.
• The cost of funding inventory will be reduced in the future.  In the current period net income may also be increased by a LIFO liquidation from reduced inventory levels.
• The current period decline in the value of the trading securities has been reflected in current period income, as has the previous gain. Although the sale will increase cash, it will have no effect on current period income. If the current period decline is deemed to be temporary, the company is selling a potentially profitable security for a short-term cash gain.
• Reissuance of treasury shares will increase cash, but will have no effect on current period income as any “gain” or “loss” is reflected in additional paid in capital, not income. If the stock price is considered to be temporarily depressed, the company is foregoing a future sale at a greater market price and is, thus, suffering current dilution of shareholder value. 

Exercise 7-8 (20 minutes)

a.   Depreciation is neither a source nor a use of cash. Instead, depreciation is an allocation of the cost of an asset over its useful life.

b.   A major cause of the belief that depreciation is a source of cash is the "add back" presentation in the SCF prepared using the indirect format. This presentation adds depreciation to net income and gives the erroneous impression that it increases cash from operations.

c.   There is one sense in which depreciation is a source of cash, and for this reason we must not overemphasize the idea that depreciation is not a source of cash. Namely, when selling prices are sufficient to recover the depreciation expense allocated to products sold, then revenues do provide management with a discretionary, even if temporary, inflow of cash (assuming no significant change in operating working capital). Normally, management will have to invest this cash in fixed assets replacements to continue in business on a long‑term basis. However, in the event of a financial crisis or cash shortfall, management has the option of diverting such cash to uses that will avert a liquidity crisis. This is the one exception that may allow one to regard depreciation as a temporary “source of cash.”

Exercise 7‑9 (60 minutes)

a.   Cash Collections Computation:

Notes:
[a]  Balance at 7/29/Year 10........................................               $624.5  [33]
Less: increase in Year 10.....................................                 (60.4) [61]
$564.1
[b]This amount is overstated by the provision for doubtful accounts expense that is included in another expense category.

b.   Cash Dividends Paid Computation:

Note [a]: Item [89] represents dividends declared, not dividends paid (see also Item [77]).

c.     Cost of Goods and Services Produced Computation:

 

d.   The entry for the income tax provision for Year 11 is: 
Income tax expense [27]...........................................         265.9
Deferred income tax (current)  plug....................                        12.1
Income tax payable..................................................                       230.4
Deferred income tax (noncurrent) [a] ................                         23.4

Notes:
(1) The entry increases current liabilities by $12.1 since deferred income tax (current) is credited by this amount. It also increases current liabilities by $230.4 [124A], the amount of income taxes payable.
(2) The [a] is the difference in the balance of the noncurrent deferred income tax item [176] = $258.5 ‑ $235.1 = $23.4.
(3) Also, $23.4 + $12.1 = $35.5, which is total deferred tax [59] or [127A]

Exercise 7‑9—continued

e.   Depreciation expense has no effect on cash from operations. The credit, when recording the depreciation expense, goes to accumulated depreciation, a noncash account.

f.    These provisions are added back because they affect only noncash accounts, the charge to earnings must be removed in converting it to the cash basis.

g.   The “Effect of exchange rate changes on cash” represents translation adjustments (differences) arising from the translation of cash from foreign currencies to the U.S. dollar.

• Any gain or loss is reported under "other, net"—Item [60].

 

• Free cash flows =

 Cash flow from operations – Cash used for capital additions – Dividends paid
Year 11: $805.2 – $361.1 – $137.5 = $306.6 
Year 10: $448.4 – $387.6 – $124.3 = $(63.5)
Year 9:   $357.3 – $284.1 –   $86.7 = $(13.5)

• Start-up companies usually have greater capital addition requirements and lower cash inflows from operations.  Also, start-ups rarely pay cash dividends.  Free cash flow earned by start-up companies is usually used to fund the growth of the company, especially if successful.

• During the launch of a new product line, the statement of cash flows can be affected in several ways.  First, cash flow from operations is lower because substantial advertising and promotion is required and sales growth has not yet been maximized.  Second, substantial capital additions are usually necessary to provide the infrastructure for the new product line. Third, cash flow from financing can be affected if financing is obtained to launch this new product line.

Exercise 7-10 (15 minutes)

• Revenues are, in certain instances, recognized before cash is received (that is, when earned). Expenses are, in certain instances, recognized after cash is paid (that is, matched with revenues).  As a result, net income can be positive when operating cash flows are negative.  Consider some examples: (1) If accounts receivable increase substantially during the year, this implies that revenues outpaced cash collections.  (2) If a company builds up its inventory levels substantially, then cash is paid out but no expense is recognized.  (3) If the company reduces its accounts payable balances substantially during the year, then cash flows can be negative when net income is positive.

• Operating cash flows can serve as one indicator of earnings quality because over a number of years, cash flows should approximate earnings.  If cash flows from operations are consistently lower than earnings, it is possible that the reported earnings are not of high quality. (As with any broad guideline, one must look for corroborating evidence.)

Exercise 7-11 (15 minutes)

• During the growth stage, a company invests heavily in infrastructure growth and into advertising and promotion.  As the company transitions into the “cash cow” stage, the company reduces the investment in both infrastructure growth and advertising and promotional activities.  This transition would be manifested in the statement of cash flows by increased operating cash flows (less cash outflows for advertising and promotion, higher margins, so forth) and decreased use of cash for investing activities.

• The decline of a “cash cow” would be reflected in the statement of cash flows by declining cash flows from operations.  The declining operating cash flows will result from declining sales of the fading “cash cow” products.