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Free Cash Dividend Payout, calculated by dividing common dividends by adjusted free cash flow, provides useful insight into the relationship between cash flow and dividends and a company�s ability to pay them in the future. As the dividend payout increases consistently through time, it indicates that dividends are growing faster than adjusted free cash flow. In such instances, the dividend being paid might not be sustainable and is at risk for decline. When the dividend payout decreases, it indicates that adjusted free cash flow is growing faster than dividends. As a result, the dividend being paid is safer and is a potential candidate for increase.

This study calculates a dividend payout using adjusted free cash flow for the non-financial firms of the S&P 100 for the years 2000, 2001, and 2002. Adjusted free cash flow was calculated by subtracting capital expenditures and preferred dividends from operating cash flow adjusted for nonoperating and unsustainable items. Insights are provided into possible changes in corporate dividend policy at several firms.


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Excess Cash Margin, ECM, calculated by dividing by revenue the difference between adjusted operating cash flow and adjusted operating earnings, provides useful insight into the relationship between cash flow and earnings. When ECM declines in a consistent manner it indicates that earnings are growing faster or declining more slowly than cash flow. As a result, relative to the scale of operations, increasing levels of non-cash accounts are accumulating on the balance sheet. Earnings generated in this manner, that is, with declining cash flow confirmation, are not sustainable and are at risk for decline. When ECM increases consistently it indicates that operating cash flow is either growing faster or falling more slowly than earnings. As a result, relative to the scale of operations, the balance sheet is being liquidated. Operating cash flow generated in this manner, that is, without consistent earnings support, is not sustainable and is at risk for decline. The better, more sustainable relationship between operating cash flow and earnings is when the two measures grow at consistent rates, resulting in a constant ECM through time.

This study calculates ECM for the non-financial firms of the S&P 100 for the years 2000, 2001, and 2002 and provides commentary on the results. Insights are provided into firms with a declining ECM, an increasing ECM, and a stable ECM.


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Operating cash flow in 2000, 2001, and 2002 for the S&P 100 was adjusted to remove items that may provide misleading signals of operating performance. Nine adjustments were made, separated into three categories - (1) where flexibility in GAAP for cash flow reporting was used to alter cash flow, (2) where the requirements of GAAP result in misleading operating cash flow amounts, and (3) where nonrecurring operating cash receipts and payments lead to operating cash flow that is non-sustainable. Adjustments resulted in an average reduction in operating cash flow in 2000 of 5% and an average increase in operating cash flow in 2001 of 3.1% and in 2002 of 2.9%. Certain individual company adjustments were quite significant, resulting in some cases, in much more operating cash flow than actually reported, and in other cases, much less.


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In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 150 - Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.

This report highlights the provisions of SFAS 150 and the impact it will have on selected companies' financial statements.


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Companies use short-term investments as a vehicle to park surplus cash. When such investments are classified as trading securities, cash used in their purchase and proceeds provided from their sale are included in operating cash flow. Classifying cash flow from trading securities as operating by non-financial companies can mislead users of financial statements regarding a company's ability to generate cash flow from sustainable sources. In this report we survey the practices of non-financial companies regarding their inclusion of cash provided (used) by trading securities in operating cash flow.


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Numerous companies maintain cash overdraft balances. These seemingly innocuous accounts can have material effects on reported amounts of cash and operating cash flow. In this report, updated from the original published in January 2003, we survey reporting practices for overdrafts and draw attention to cases where analysts may be misled.


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A study released by the GAO in October 2002, Financial Statements Restatements: Trends, Market Impact, Regulatory Responses and Remaining Challenges, reported that the number of restatements increased 145% from 1997 to 2001. In 2002, a study by Huron Consulting Group reported that the number of restatements increased an additional 22% over 2001. Both reports noted a growing presence of large companies making restatements.

Many restatements move to future periods earnings that have been recognized previously. For example, a restatement entailing premature revenue recognition may result in deferral of that revenue for future recognition. Capitalized costs written down through restatement eliminate future amortization expenses. The net result of such restatements is that companies report the same earnings twice - once in prior years and then again in future periods. Not all restatements, however, affect future earnings. For example, restatements that eliminate fictitious revenue and assets do not move prior-year earnings to future periods.

This report looks at the effects of restatements on future earnings. Our objective is to highlight selected restatements that were filed with the SEC during 2002 and early 2003 that will benefit future-period earnings by material amounts.


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On January 17, 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 - Consolidation of Variable Interest Entities. Given companies' widespread use of VIEs (formerly SPEs) to finance their capital needs, the Interpretation will significantly affect the financial statements of numerous companies. Most significantly, the Interpretation will require primary beneficiaries to consolidate the assets and related debt of their VIEs rather than maintaining such balances and risk off of their balance sheets.

This report summarizes the guidance provided in Interpretation 46 and identifies several firms that will need to consider whether certain off-balance-sheet entities may need to be consolidated. For most of the firms reviewed, limited disclosures did not permit us to quantify the effects of consolidation. When effective in 2003, new disclosures will make it easier to assess the financial statement effects of unconsolidated entities.


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Numerous companies maintain cash overdraft balances. These seemingly innocuous accounts can have material effects on reported amounts of cash and operating cash flow. In this report, updated from the original published in January 2003, we survey reporting practices for overdrafts and draw attention to cases where analysts may be misled.


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