Cash flow Statement Flashcards
Differences between IFRS and US GAAP for cash flow statement
US GAAP:
- Interest received/paid and dividends received = operating activity
- Dividend paid = financing activity activity
IFRS:
Cash flow from operating activities
Day to day activities.
Increase in assets = cash outflow
Decrease in assets = cash inflow
Increase in liabilities = cash inflow
Decrease in liabilities = cash outflow
Cash flow from investing
Purchases/sale of long term assets (i.e. PP&E and intangible assets) + other investments (long/short term equity/debt investments)
Cash flow from financing
Obtaining/repaying capital to shareholders and creditors. Basically, you’re looking at changes in ‘Non-current liabilities’ and ‘Equity’ section of the balance sheet
Non-cash investing/financing
Simple rule: no cash involved, no reporting
e. g.:
- Conversion of convertible securities
- Stock Dividends
- Barter
- Seller financed real estate transactions
Direct Method
Income statement items that are reported on an accrual basis are all converted to cash basis. In essence, look at the income statement and convert each line to cash basis. There’s no difference between Direct and Indirect Method except for presentation. CFF, CFI and CFO of both direct and indirect should be identical
e.g.:
Cash collected from customers
Cash paid to suppliers
Cash paid to employees
Cash expense
etc.
Cash paid for interest
Cash paid for taxes
Useful b/c it explicitly lists actual sources of in/outflows, therefore useful in evaluating past performance and projecting future cash flows
Indirect Method
Net income is adjusted for
- Noncash expenses
- Non-operating items
- Changes in working capital accounts (current assets and current liabilities) resulting from accrual accounting
Cash collected by customers (Direct)
Start off from Beg A/R + Revenue - Cash collected = End A/R
You can rearrange it:
beg A/R - end A/R + revenue = cash collected
Alternatively:
cash collected = revenue - ΔA/R
Mathematically, the aforementioned formula seems strange, but it makes sense becuse this is cash receipt. If A/R increased, we didn’t receive any cash, which is why we’d subtract that increase from revenue. If A/R decreased, we received cash, so in the above formula, we would end up adding that change to revenue
Cash paid to suppliers
Start off from here: Beg A/P + Purchases - Cash paid to suppliers = End A/P
Since we know that: Beg Inventory + Purchases - COGS = End inventory
Therefore, Purchases = COGS + Δinventory
Thus: Beg A/P - End A/P + Purchases = Cash paid to suppliers
Alternatively, Cash paid to suppliers = Purchases + ΔA/P
Cash paid to employees
Beg Salaries/Wages payable + Salaries/Wages Expense - Cash paid to employees = End Salaries/Wages payable
Therefore, Beg Salaries/Wages payable - End Salaries/Wages payable+ Salaries/Wages Expense = Cash paid to employees
Alternatively:
Cash paid to employees = Salary/Wages Expense + ΔSalaries/Wages Payable
Cash paid for other operating expenses
Cash paid for other operating expenses = (Other operating expenses) + ΔPrepaid Expenses + ΔOther Accrued Liabilities
The ( ) around other operating expenses means it’s an outflow, so when the brackets are removed, it would be a negative number
Cash paid for interest
Beg interest payable + Interest expense - Cash paid for interest = End interest payable
Therefore, Beg interest payable - end interest payable + Interest expense = cash paid for interest
Cash paid for interest = interest expense + Δinterest payable
Cash paid for taxes
Beg tax payable + tax expense - cash paid for taxes = end tax payable
Thus, Beg tax payable - end tax payable + tax expense = cash paid for taxes
Cash paid for taxes = tax expense + Δtax payable
Additions to cash (Indirect Method)
- Depreciation/Amortization
- Amortization of Bond Discount
- Non-operating losses
- Increase in Deferred tax liabilities
- Decrease in assets
- Increase in liabilities
Subtractions to cash (Indirect Method)
- Amortization of Bond Premium
- Non-operations gain
- Decrease in deferred tax liabilities
- Increase in Assets
- Decrease in Liabilities
Converting from Indirect to Direct
You get the total revenue and total expenses and you adjust both the revenue and expenses by deducting any non-cash revenues/expenses (see image)
Cash flow analysis: Major Sources and Uses of Cash
- Will depend on the company’s stage of growth
Early stage, CFO is probably negative since company is still building
For mature companies, CFO should be greater than CFF and CFI combined
Cash flow analysis: Operating Cash Flow
- are operations source of cash? how?
- cash flow from operations vs net income: indicator of earnings quality (high net income should translate to high cash flow from operations = good earnings)
- mature company: CFO should be greater than NI
consistency of CFO? we want it to be consistent (low variability)
Cash flow analysis: investing cash flow
- sources and use of cash
- is CFO > Capital expenditure?
- if CFI> 0, what is being sold and why?
Cash flow analysis: financing cash flow
- raising or repaying capital? why?
- repurchase of shares? why? no investment opportunities? or are you delivering capital gains via share buybacks?
Free cash flow
Free cash flow is a measure of cash that is available for discretionary purposes. This is the cash flow that is available once the firm has covered its capital expenditures.
Free cash flow to the firm (FCFF)
Free cash flow to the firm (FCFF) is the cash available to all investors, both equity owners and debt holders. FCFF can be calculated by starting with either net income or operating cash flow.
FCFF is calculated from net income as:
FCFF = NI + NCC + [Int × (1 − tax rate)] − FCInv − WCInv
where:
NI = net income
NCC = noncash charges (depreciation and amortization)
Int = cash interest paid
FCInv = fixed capital investment (net capital expenditures)
WCInv = working capital investment
FCFF can also be calculated from operating cash flow as:
FCFF = CFO + [Int × (1 − tax rate)] − FCInv
where:
CFO = cash flow from operations
Int = cash interest paid
FCInv = fixed capital investment (net capital expenditures)
Free cash flow to equity (FCFE)
Free cash flow to equity (FCFE) is the cash flow that would be available for distribution to common shareholders. FCFE can be calculated as follows:
FCFE = CFO − FCInv + net borrowing
where:
CFO = cash flow from operations
FCInv = fixed capital investment (net capital expenditures)
net borrowing = debt issued – debt repaid
