Value Investing Forum

Jae – thanks greatly for your thoughts on this. I fully accept the ideas Jason and yourself have outlined and totally see where you're coming from…

I am still struggling with it practically though (too stupid to get the figures to match! ). At the risk of being bothersome and of presenting a garbled mess (preview/html tags somehow?) below are the last 2 years annual financial statements for AAPL

Any chance someone could put me out of my misery and explain which of the other figures I need to add/subtract to arrive at the figure 1,212.0 for changes in working capital, period ending 2010?

AAPL  -  CASHFLOW PERIOD ENDING                    2010            2009

Net Income/Starting Line                                     14,013.0          8,235.0
Depreciation/Depletion                                          1,027.0             734.0
Amortization                                                                    –                  –
Deferred Taxes                                                     1,440.0          1,040.0
Non-Cash Items                                                       903.0            736.0
Changes in Working Capital                                  1,212.0          (586.0)
Cash from Op activities                                       18,595.0        10,159.0
Capital Expenditures                                           (2,121.0)       (1,213.0)
Other Investing Cash Flow  Items Total            (11,733.0)      (16,221.0)
Cash from Investing Activities                           (13,854.0)      (17,434.0)
Financing Cash Flow Items                                     345.0             188.0
Total Cash Dividends Paid                                             –                  –
Issuance (Retirement) of Stock, Net                        912.0            475.0
Issuance (Retirement) of Debt, Net                               –                  –
Cash from Financing Activities                             1,257.0             663.0
Foreign Exchange Effects                                              –                  –
Net Change in Cash                                             5,998.0        (6,612.0)

AAPL BALANCE SHEET PERIOD ENDING              2010          2009       

Cash                                                                              –                –
Cash & Equivalents                                            11,261.0        5,263.0
Short Term Investments                                     14,359.0     18,201.0     
Cash and Short Term Investments                    25,620.0      23,464.0     
Accounts Receivable – Trade, Net                       5,510.0        3,361.0     
Notes Receivable – Short Term                                     —                 –
Receivables – Other                                             4,414.0        1,696.0
Total Receivables, Net                                         9,924.0        5,057.0
Total Inventory                                                     1,051.0           455.0
Prepaid Expenses     –                                                  –           309.0     
Other Current Assets, Total                                 5,083.0        2,270.0
Total Current Assets                                          41,678.0      31,555.0
Property/Plant/Equipment, Total – Gross             7,234.0        4,667.0
Accumulated Depreciation, Total                        (2,466.0)     (1,713.0)
Property/Plant/Equipment, Total – Net                 4,768.0         2,954.0
Goodwill, Net                                                           741.0           206.0
Intangibles, Net                                                       342.0           353.0     
Long Term Investments                                     25,391.0      10,528.0
Note Receivable – Long Term                                        —                 —     
Other Long Term Assets, Total                            2,263.0        1,905.0     
Other Assets, Total                                                        —                 –
Total Assets                                                        75,183.0     47,501.0
Accounts Payable                                               12,015.0        5,601.0
Payable/Accrued                                                            —                 –
Accrued Expenses                                                1,593.0        1,293.0
Notes Payable/Short Term Debt                                  0.0               0.0
Current Port. of LT Debt/Capital Leases                        —                 –
Other Current liabilities, Total                               7,114.0        4,612.0     
Total Current Liabilities                                       20,722.0     11,506.0
Long Term Debt                                                             —                 –
Capital Lease Obligations                                              —                 –
Total Long Term Debt                                                 0.0               0.0
Total Debt                                                                    0.0               0.0
Deferred Income Tax                                            4,300.0       2,216.0
Minority Interest                                                             —                 –
Other Liabilities, Total                                           2,370.0       2,139.0
Total Liabilities                                                    27,392.0     15,861.0
Redeemable Preferred Stock, Total                               —                –
Preferred Stock – Non Redeemable, Net                        —                –
Common Stock, Total                                         10,668.0       8,210.0
Additional Paid-In Capital                                               —                –
Retained Earnings (Accumulated Deficit)           37,169.0     23,353.0
Treasury Stock – Common                                             —                –
ESOP Debt Guarantee                                                   —                –
Unrealized Gain (Loss)                                                  —                –
Other Equity, Total                                                  (46.0)            77.0
Total Equity                                                        47,791.0     31,640.0
Total Liabilities & Shareholders' Equity              75,183.0     47,501.0
Shares Outs – Common Stock Primary Issue       915.97         899.80
Shares Outstanding – Common Issue 2                       —                  –
Shares Outstanding – Common Issue 3                       —                  –
Shares Outstanding – Common Issue 4                       —                  –
Total Common Shares Outstanding                    915.97          899.80
Total Preferred Shares Outstanding                            —                  –

AAPL INCOME PERIOD ENDING                         2010            2009
Revenue                                                           65,225.0      42,905.0
Other Revenue, Total                                                  —                  –
Total Revenue                                                  65,225.0      42,905.0
Cost of Revenue, Total                                     39,541.0      25,683.0
Gross Profit                                                       25,684.0      17,222.0
Selling/General/Admin. Expenses, Total             5,517.0        4,149.0
Research & Development                                   1,782.0        1,333.0
Depreciation/Amortization                                            —                  –
Interest Expense, Net – Operating                               —                   –
Interest/Investment Income – Operating                       —                  –
Interest Expense(Income) – Net Operating                   —                  –
Unusual Expense (Income)                                          —                  –
Other Operating Expenses, Total                                 —                  –
Total Operating Expense                                   46,840.0      31,165.0
Operating Income                                              18,385.0      11,740.0
Interest Expense, Net Non-Operating                            —                —     
Interest/Invest Income – Non-Operating                  311.0          407.0
Interest Income(Exp), Net Non-Operating                     —                 —     
Gain (Loss) on Sale of Assets                                       —                 –
Other, Net                                                             (156.0)           (81.0)
Net Income Before Taxes                                  18,540.0      12,066.0
Provision for Income Taxes                                 4,527.0        3,831.0
Net Income After Taxes                                     14,013.0        8,235.0
Minority Interest                                                            —                  –
Equity In Affiliates                                                         —                  –
U.S. GAAP Adjustment                                                 —                  –
Net Income Before Extra. Items                        14,013.0         8,235.0
Accounting Change                                                      —                  –
Discontinued Operations                                              —                  –
Extraordinary Item                                                        —                  –
Tax on Extraordinary Items                                          —                  –
Net Income                                                       14,013.0          8,235.0
Preferred Dividends                                                      —                  –
General Partners' Distributions                                     —                  –
Miscellaneous Earnings Adjustment                             —                   –
Pro Forma Adjustment                                                 —                   –
Interest Adjustment – Primary EPS                               —                   –
Income Available to Com Excl ExtraOrd            14,013.0         8,235.0
Income Available to Com Incl ExtraOrd             14,013.0         8,235.0
Basic Weighted Average Shares                          909.46          893.02
Basic EPS Excluding Extraordinary Items             15.408            9.222
Basic EPS Including Extraordinary Items              15.408            9.222
Dilution Adjustment                                                       —                   –
Diluted Weighted Average Shares                        924.71           907.01
Diluted EPS Excluding ExtraOrd Items                 15.154             9.079
Diluted EPS Including ExtraOrd Items                  15.154             9.079
DPS – Common Stock Primary Issue                      0.000             0.000
Gross Dividends – Common Stock                             0.0                 0.0
Total Special Items                                                      —                    –
Normalized Income Before Taxes                    18,540.0         12,066.0
Effect of Special Items on Income Taxes                    —                     –
Inc Tax Ex Impact of Sp Items                           4,527.0            3,831.0
Normalized Income After Taxes                       14,013.0            8,235.0
Normalized Inc. Avail to Com.                          14,013.0            8,235.0
Basic Normalized EPS                                        15.408            9.222
Diluted Normalized EPS                                      15.154            9.079

Jason many thanks for your input which is much appreciated. I can see what you're saying about needing to adjust the Net Income line to get cash.

My problem is I still can't get the numbers to add up in a real practical example. If what you say is true then I should be able to arrive at the CIWC figure by looking at the balance sheet. If we just look at accounts receivable then the figures definitely don't add up (ie if we take CIWC as basically change in Accounts Receivable). However, I can see yours was just a simple example and in a real world case we would have to look at changes in all non-cash item on the balance sheet including but not limited to AR (right?), ie we'd need to include inventory, accounts payable (prepaid expenses? short term investments? Anything else?)

However using any permutation or combination of these items added, subtracted, multiplied by my birthday (just kidding) I cannot seem to arrive at the figure 1212 for changes in working capital, Apple, period ending 25/9/2010 (or any other company/period come to that).

Jason (or anyone else) any ideas if this can be done? If so how? Can you demonstrate it practically with a real company? If it can't be done from other items on balance (or income) then why not? Again help appreciated

Discountvalue – matter of fact I am wondering about "owner earnings" too!- but I thought I couldn't understand what it was all about without first understanding 'changes in working capital' as no one can seem to agree whether CIWC should be included  in the calculation! Thanks for ur input…

From my understanding, changes in working capital is not calculated as WC (present) – WC (past). Rather, this is the line item that is used to change the net income into operating cash flows (OCF). For example, let's say that company XYZ reported a net income of $10M, with depreciation and amortization line (D&A) of $1M. If we assume all of the income for the company is in cash form we just add the non-cash charge of D&A to the net income and get an OCF of $11M.

However, what if the company was not paid fully in cash for its sales but partly in IOU's (accounts receivables)? Let's say that $3M in AR increases and $7M in cash. Then we must write off the increase in accounts receivables ($3M) from the net income along with D&A ($1M) to get to the OCF, in this case that gives us $(10 – 3 – 1)M = $6M. The line called "Changes in Working Capital" for this company would then be -$3M because that is its contribution to getting the OCF. The signage for this line differs and sometimes the line will read +$3M, but again they will subtract this number from the net income to get the same OCF as above. 

So as you can see, the Changes in Working Capital (CWIC) is essentially removing the gains recorded in net income that are NOT CASH! It will do the same with losses recorded in net income that are NOT CASH (e.g. accounts payable). 

From this example, it is easy to see how the CWIC line is NOT equal to WC (present) – WC (past) when the definition of WC is current assets – current liabilities. Because if the company gained $7M in cash and $3M in AR along and, CWIC line should be $3M (i.e. the rise in AR) whereas the other calculation would give us an incorrect CWIC of $10M (because current assets will have increased by $10M against no increase in current liabilities). 

Maybe I'm missing something, but why do you need to adjust for changes in working capital to arrive at owner earnings? Doesn't the income statement add or subtract these expenses and assets as you go along above the line of 'Income From Operations'?