Cash Flow Statements

Question 1

When adjusting Net Income to calculate CFO, what adjustments should be made?

Answer 1

Only adjust net Income for factors that would have affected Net Income.

Simply put, NI is from the ongoing operations of a company’s normal line of business.

Question 2

Define CFO and provide examples

Answer 2

Cash flow from operating activities (CFO), sometimes referred to as “cash flow from operations” or “operating cash flow,” consists of the inflows and outflows of cash resulting from transactions that affect a firm’s net income.

Inflows
Cash collected from customers
Interest and dividends received
Sale proceeds from trading securities

Outflows
Cash paid to employees and suppliers
Cash paid for other expenses
Acquisition of trading securities
Interest paid on debt or leases
Taxes paid

Question 3

Define CFI and provide examples

Answer 3

Cash flow from investing activities (CFI) consists of the inflows and outflows of cash resulting from the acquisition or disposal of long-term assets and certain investments.

Inflows
Sale proceeds from fixed assets
Sale proceeds from debt and equity investments
Principal received from loans made to others

Outflows
Acquisition of fixed assets
Acquisition of debt and equity investments
Loans made to others

Question 4

Define CFF and provide examples

Answer 4

Cash flow from financing activities (CFF) consists of the inflows and outflows of cash resulting from transactions affecting a firm’s capital structure.

Inflows
Principal amounts of debt issued
Proceeds from issuing stock

Outflows
Principal paid on debt or leases
Payments to reacquire stock
Dividends paid to shareholders

Question 5

What is the formula for purchases?

Answer 5

P = COGS + EI - BI

There is no adjustment for inventory required if purchases are given

Question 6

How do you calculate the tax rate when not given the rate?

Answer 6

Tax expense / income before tax

Question 7

What is the long and short form FCF formula?

Answer 7

Long:

FCFF = NI + NCC - WCInv + Int (1-T) - FCInv

NCC = Non-Cash Charges
NI + NCC - WCInv = CFO
WCInv - CA - CL

Shot

FCFF = CFO + Int (1-T) - FCInv

Question 8

Calculate FCFE

Answer 8

CFO - FCInv + Net Debt Increase

Question 9

What are the components of Net Income

Answer 9

Revenue - (Expenses + Interest + Tax)

Question 10

Explain the treatment of Interest, Dividends, Tax and Overdrafts for USGAAP and IFRS

Answer 10

US GAAP / IFRS

Interest Received: CFO / CFO or CFI
Interest Paid: CFO / CFO or CFF
Dividends Received: CFO / CFO or CFI
Dividends Paid: CFF / CFO or CFF
Taxes Paid: CFO / All
Overdrafts: CFF / Considered as cash / cash equivalent

Question 11

Calculate cash received from customers

Answer 11

Sales
+ Decrease (or - Increase) in Accounts Receivable.

Question 12

Calculate cash paid to supliers

Answer 12

Cost of Goods Sold
+ Increase (or - Decrease) in Inventory
+ Decrease (or - Increase) in Accounts Payable

Question 13

Calculate cash paid for operating expenses

Answer 13

Operating Expenses
+ Increase (or - decrease) in prepaid expenses
+ decrease (or - increase) in accrued liabilities.

Question 14

Calculate interest expense

Answer 14

Cash paid for interest + Ending interest payable - Beginning interest payable

Question 15

Calculate the cash to income ratio

Answer 15

CFO / operating income

Question 16

calculate fcff

Answer 16

FCFF = NI + NCC + Int(1 – t) – FCInv – WCInv