Chapter 3: Statement of Cash Flows

Question 1

What are the three segments of cash flows?

Answer 1

Operating, Investing & Financing Activities

Question 2

Formula for Cash Flow from Operations (CFFO)

Answer 2

Add: Sales of goods + interest on receivables + dividends received
MINUS: Payment to suppliers, interest paid on liabilities, income taxes, salary & wages paid

Question 3

Formula for Cash Flow from Investing (CFFI)

Answer 3

Add: Sales of PPE, sales of investments in securities, collection of principal on loans made to others
MINUS: purchase of PPE, purchase of long-term investments, loans to others

Question 4

Formula for Cash Flow from Financing (CFFF)

Answer 4

Add: Sales of stock, bonds & borrowing
MINUS: payments to purchase stock, principal payments to retire bonds and loans, dividends paid

Question 5

Direct Method of Cash Flow Preparation

Answer 5

Reports components of cash from operations as gross receipts and payments

Question 6

Indirect Method of Cash Flow Preparation

Answer 6

Reports net cash inflow (outflow) from operations as an adjustment of net income

Question 7

4 Steps to Calculating Cash Flow

Answer 7

1. Calculate Δ each balance sheet account
2. Identify if cash flow is CFFO, CFFI or CFFF
3. Build preliminary statement of cash flow
4. Calculate Ending RE = Beginning RE + NI - Dividends Paid
   Add depreciation to Cash, subtract from PPE
   Add amortization to Cash, subtract from PPE

Question 8

Formula: Operating Funds Ratio

Answer 8

CFFO / NI

Question 9

Formula: Operating Cash Flow to Current Liabilities Ratio

Answer 9

CFFO / Current Liabilities

Question 10

Formula: Cash Conversion Ration

Answer 10

Cash from Sales / Net Sales

Question 11

EBITDA

Answer 11

Earnings Before Interest, Taxes, Depreciation and Amortization

Question 12

Formula: Free Cash Flow

Answer 12

FCF = CFFO - CapEx

Question 13

Formula: Discretionary Cash Flow

Answer 13

DCF = CFFO - Required Debt Payments - Dividend Payments

Question 14

market capitalization

Answer 14

refers to a firm’s current fair market value,

stock price x # of stock

Question 15

Earnings persistance

Answer 15

extent to which earnings reoccur over time

Question 16

Permanent earnings

Answer 16

sustainable earnings

Question 17

transitory earnings

Answer 17

non-sustainable earnings, including single-period items like extraordinary gains/losses, special items, restructuring charges, accounting changes, discontinued ops

Question 18

intrinsic value

Answer 18

underlying economic value of a business as a going concern

Question 19

Restructuring charges

Answer 19

costs of down sizing like layoffs, closing facilities, changing structure, paying down debt, etc.

Question 20

Taking a bath

Answer 20

lumping restructuring charges poor operating years

Question 21

Discontinued Operations

Answer 21

Separated from continuous earnings into: operating income from discontinued operations and gain on sale of net assets disposed.

Question 22

Formula: Basic Earnings per share

Answer 22

net income / # of common shares outstanding

Question 23

Formula: Diluted Earnings per share

Answer 23

net income / (# of shares outstanding & # available to issue for stock options, etc)

Question 24

Pro Forma Earnings

Answer 24

“Earnings before bad stuff” aka discontinued operations, restructuring charges, extraordinary and special items, accounting policy changes