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CFA Level 1 > Financial Reporting & Analysis - Cash Flow Statements > Flashcards

Financial Reporting & Analysis - Cash Flow Statements Flashcards

1
Q

Definition: operating cash flows

A

Day to day activities that produce revenue. Also includes dealing or trading securities.

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2
Q

Definition: investing cash flows

A

Purchasing & selling long-term assets. Excludes: 1) cash and cash equivalents, 2) securities held for dealing & trading (even if not the primary business activity).

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3
Q

Definition: financing cash flows

A

Obtaining or repaying capital (FYI, indirect borrowing through accounts payable is an operating cash flow).

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4
Q

Interest received (IFRS vs. GAAP)

A
  1. IFRS: operating or investing

2. GAAP: operating

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5
Q

Interest paid (IFRS vs. GAAP)

A
  1. IFRS: operating or financing

2. GAAP: operating

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6
Q

Dividends received (IFRS vs. GAAP)

A
  1. IFRS: operating or investing

2. GAAP: operating

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7
Q

Dividends paid (IFRS vs. GAAP)

A
  1. IFRS: operating or financing

2. GAAP: financing

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8
Q

Bank overdrafts (IFRS vs. GAAP)

A
  1. IFRS: part of cash equivalents

2. GAAP: financing

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9
Q

Taxes paid (IFRS vs. GAAP)

A
  1. IFRS: generally ops, but can be financing or investing if tied to activity
  2. GAAP: operating
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10
Q

Format (IFRS vs. GAAP

A
  1. IFRS: direct encouraged, but indirect okay

2. GAAP: direct encouraged, but indirect okay

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11
Q

Direct method

A

shows specific operating flows that comprise the total. If using this method, indirect reconciliation required under GAAP.

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12
Q

Indirect method

A

Begins with net income and shows how operating flows are achieved through adjustments.

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13
Q

Formula: cash from customers

A

Revenue - increase accounts receivable

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14
Q

Formula: cash paid to suppliers

A

Costs of goods sold + increase inventory - increase in accounts payable

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15
Q

Formula: ending inventory

A

Beginning inventory + purchases - costs of goods sold

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16
Q

Formula: cash paid to employees

A

Salary & wage expense - increase in wage payable

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17
Q

Formula: ending salary payable

A

Beginning salary payable + salary expense - cash paid to employees

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18
Q

Formula: cash paid for other operating expense

A

other operating expense - decrease in prepaid expense - increase in accrued liabilities

19
Q

Formula: cash paid for income taxes

A

Income tax expense - increase payable

20
Q

Formula: cost of equipment sold

A

Beginning equipment balance + equipment purchased - end balance

21
Q

Formula: accumulated depreciation of equipment sold

A

Beginning accumulated depreciation + depreciation expense - end accumulated depreciation

22
Q

Formula: cash received from equip sold

A

Historical cost - accumulated depreciation of equipment sold + gain on sale

23
Q

Formula: cash paid for dividends

A

Beginning retained earnings + net income - ending retained earnings

24
Q

Indirect adjustments

A

Should add items to net income that would have reduced net income through accruals and subtract those that helped through accruals

25
Q

Conversion of cash flows: indirect to direct

A
  1. Segregate net revenue into revenue and expense
  2. Remove any non-operating & non-cash items
  3. Convert accrual amounts to cash flow amounts by adjusting for working capital (i.e. cash paid to employees, suppliers, etc)
26
Q

Cash flow analysis: step 1

A
  • Determine major sources of cash. Can vary based on the company’s stage of growth.
  • If ops cash flow is negative for a long time, will need to be fund by financing or investing, which is not sustainable indefinitely.
27
Q

Cash flow analysis: step 2

A
  • Operations: for a mature company operation cash flow should be > net income.
  • Difference could indicate earnings quality (i.e. if much less cash, company may be using aggressive accounting.
28
Q

Cash flow analysis: step 3

A
  • Investing: evaluate each line-item. If major investments are made, how are those financed? Ops cash, selling assets? Does it make sense to sell those assets? etc.
29
Q

Cash flow analysis: step 4

A
  • Financing: company raising or paying down capital and what the nature of capital sources are.
30
Q

Common size analysis: cash flow

A

Two methods:

  1. As a % of total cash inflows our outflows (if inflow or outflow).
  2. As a % of net income
31
Q

Formula: free cash flow

A

Operating cash flow - capital expenditures

32
Q

Formula: free cash flow to firm (FCFF)

A
  1. Net income + interest expense*(1-tax rate) - capital expenditures - working capital expenditures
  2. Cash flow from operations + interest expense*(1-tax rate) - capital expenditures
33
Q

Formula: free cash flow to equity (FCFE)

A
  1. CFO - capital expenditures + net borrowing

2. Excess represents cash above fixed investments and repayment of debt that could be redistributed to investors.

34
Q

Ratio: cash flow to revenue

A

Cash flow from operations / net revenue

35
Q

Ratio: cash return on assets

A

Cash flow from operations / avg. total assets

36
Q

Ratio: cash return on equity

A

Cash flow from operations / avg. shareholder’s equity

37
Q

Ratio: cash to income

A

Cash flow from operations / operating income

38
Q

Ratio: cash flow per share

A

(Cash flow from operations - preferred dividends) / # of common shares outstanding

39
Q

Ratio: debt coverage

A

Cash flow from operations / total debt

40
Q

Ratio: interest coverage

A

EBIT / Interest Expense

41
Q

Ratio: reinvestment

A

Cash flow from operations / cash paid for LT assets

42
Q

Ratio: debt payment

A

Cash flow from operations / cash paid for LT debt

43
Q

Ratio: dividend payment

A

Cash flow from operations / dividends paid

44
Q

Ratio: investing & financing

A

Cash flow from operations / cash outflows for investing & financing

CFA Level 1 (6 decks)

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