CFA 27: Understanding Cash Flow Statements

Question 1

operating activities

Components and Format of the Cash Flow Statement

Answer 1

Activities that are part of the day-to-day business functioning of an entity, such as selling inventory and providing services.

Question 2

dealing securities

Components and Format of the Cash Flow Statement

Answer 2

Securities held by banks or other financial intermediaries for trading purposes.

Question 3

trading securities

Components and Format of the Cash Flow Statement

Answer 3

Securities held by a company with the intent to trade them.

Question 4

investing activities

Components and Format of the Cash Flow Statement

Answer 4

Activities which are associated with the acquisition and disposal of property, plant, and equipment; intangible assets; other long-term assets; and both long-term and short-term investments in the equity and debt (bonds and loans) issued by other companies.

Question 5

financing activities

Components and Format of the Cash Flow Statement

Answer 5

Activities related to obtaining or repaying capital to be used in the business (e.g. equity and long-term debt).

Question 6

cash flow from operating activities

Components and Format of the Cash Flow Statement

Answer 6

The net amount of cash provided from operating activities.

Question 7

indirect format

Components and Format of the Cash Flow Statement

Answer 7

With reference to cash flow statements, a format for the presentation of the statement which, in the operating cash flow section, begins with net income then shows additions and subtractions to arrive at operating cash flow. Also called indirect method.

Question 8

direct format

Components and Format of the Cash Flow Statement

Answer 8

With reference to the cash flow statement, a format for the presentation of the statement in which cash flow from operating activities is shown as operating cash receipts less operating cash disbursements. Also called direct method.

Question 9

free cash flow

Cash Flow Statement Analysis

Answer 9

The actual cash that would be available to the company’s investors after making all investments necessary to maintain the company as an ongoing enterprise (also referred to as free cash flow to the firm); the internally generated funds that can be distributed to the company’s investors (e.g. shareholders and bondholders) without impairing the value of the company.