LM 4: Analyzing Statements of Cash Flows Flashcards
What are the 3 types of cash flow activities? OFI
- Operating
- Financing
- Investing
What is operating activities?
Day to day activities that create revenue, such as selling inventory, providing services, and other activities not classified as investing or financing
What is investing activities?
Purchasing and selling long-term assets and other investments. Long term assets, property, plant, equipment, as well short-term investments in equity, debt, bonds, etc.
What is financing activities?
Cash flow from financing activities measures the movement of cash between a firm and its owners, investors, and creditors. This report shows the net flow of funds used to run the company including debt, equity, and dividends.
What is non-cash investing and financing transactions and how are they recorded?
Investing and financing activities that affect assets and liabilities but not cash since acquisition or funding can be bought with common shares. do not affect cash. example; acquisition of building by issuing common stock
recorded in a separate note; like the footnotes and in the cash flow statement
What are the 2 methods for reporting cash flow from operating activities?
- Direct Method
- Indirect Method
What is direct method?
reports all cash receipts and cash payments from operating activities
(has collection from customers & deductions)
What is the indirect method?
adjusts net income for items that do not affect cash to determine net cash provided by operating activities
How is the cash flow statement linked to the balance sheet?
balance sheet shows the assets and liabilities that result, in part, from the activities on the cash flow statement.
How is cash flow statement linked to the income statement?
the net profit or net loss is linked to the cash flow statement because it shows all the cash flow activities of each section of the income statement
What is accrual accounting?
accounting method where revenue or expenses are recorded when a transaction occurs vs. when payment is received or made.
What are the steps in preparing a cash flow statement from operating activities under the direct method? DDD
- Determination of the amount of cash received from customers. (revenue)
- Determination of amount that was paid to suppliers and employees. (expenses) (subtract)
- Determination of amount that was paid for other operating expenses, interest, and income taxes (subtract)
What are the steps in preparing a cash flow statement from operating activities under the indirect method?
take net income and then make the following 3 adjustments to net income
- non-operating activities (add)
- non-cash expenses (add because of non-cash deduction)
- changes in operating working capital items(subtract) (make changes for accrual accounting and not cash accounting)
working capital includes accounts receivable/ payable, salaries payable, interest payable, and income tax payable
What is cash received from sale of equipment formula?
cash received from sale of equipment = historical cost of equipment sold - accumulated depreciation on equipment sold + gain of sale of equipment
What is dividends paid formula?
dividends paid = beginning retained earnings + net income - ending retained earnings
What cash flow activity would interest received fall in under IFRS and under US GAAP?
IFRS: Operating or Investing
US GAAP: Operating
What cash flow activity would interest paid fall in under IFRS and under US GAAP?
IFRS: Operating or Financing
US GAAP: Operating
What cash flow activity would dividends received fall in under IFRS and under US GAAP?
IFRS: Operating or Investing
US GAAP: Operating
What cash flow activity would dividends paid fall in under IFRS and US GAAP?
IFRS: Operating or Financing
US GAAP: Financing
What cash flow activity would bank overdrafts fall in under IFRS and US GAAP?
IFRS: Part of cash equivalents
US GAAP: Financing
Tax payments are treated as operating cash flows under IFRS and US GAAP, what is the one exception?
IFRS allows tax to be treated as investing or financing cash flows if they are attributable to investing or financing activities.
ex. taxes paid on gains due to the sale of a discontinued operation may be recorded as an investing activity.
Are acquisitions and disposals of long-term assets treated as financing, operating, or investing activities?
treated as investing activities.
What are 4 techniques to analyze the cash flow statement? ECFC
- evaluation of the sources and uses of cash
- common size analysis
- free cash flow to the firm (fcff) & free cash flow to equity (fcfe)
- cash flow ratios
What are the 4 steps in the evaluation of sources and uses of cash to analyze the cash flow statement? MPPP
- major sources and uses of cash between operating, investing ,and financing
- primary determinants of operating cash flow
- primary determinants of investing cash flow
- primary determinants of financing cash flow
What are 2 ways line items in common size analysis can be expressed?
- percentage of inflows as percentage of total inflows / outflows as percentage of total outflows
- percentage of net revenue
What is free cash flow?
excess of operating cash flow over capital expenditures.
What is Free Cash Flow to the Firm?
extra cash from operations after all expenses like operating expenses and maintaining its capital expenditures.
What is the formula for Free Cash Flow to the Firm from net income?
- FCFF = NI + NCC+ (Int(1- Tax Rate)) - FCInv - WCInv
-NCC = Non-Cash Charges (depreciation and amortization)
-FCInv = Capital Expenditures (fixed capital, such as equipment)
-Int= interest expense
-WCInv = Working Capital Expenditures
What is the formula for Free Cash Flow to the Firm from operating cash flow?
- FCFF = CFO + Int(1 - Tax Rate) - FCInv
-CFO= cash flow from operating
-Int= interest expense
-FCInv = Capital Expenditures (fixed capital, such as equipment)
What is Free Cash Flow to equity?
how much cash is available to the equity shareholders of a company after all expenses, reinvestment, and debts are paid for.
What is Free Cash Flow to Equity formula?
FCFE = CFO - FCInv + Net Borrowing
FCInv= Capital expenditure
What formula for FCFE do you use when net borrowing is negative?
FCFE = CFO - FCInv - Net Debt Repayment
FCInv = capital expenditure
What is the cash flow to revenue formula and use?
CFO/ Net Revenue
measures operating cash generated per dollar of revenue, a high ratio usually means company is able to turn a higher percentage of its revenue into profits and net cash flow
What is the cash return on assets formula and use?
CFO/ Average Total Assets
operating cash generated per dollar of asset investment, used to benchmark a business’s performance with other businesses in the same industry
What is cash return on equity formula and use?
CFO/ Average Shareholders Equity
Operating cash generated per dollar of owner investment
What is cash to income formula and use?
CFO/ Operating Income
how much dollars of cash flows per dollar of operating income of the company from its operating activities
What is the cash flow per share formula and use?
(CFO - Preferred Dividends) / Number of Common Shares Outstanding
Operating cash flow on a per-share basis
What is the debt coverage formula and use?
Company’s ability to make debt payments
CFO/ Total Debt
What is the interest coverage ratio formula and use?
(CFO + Interest Paid + Taxes Paid) / Interest paid
how well a firm can pay the interest due on outstanding debt
What is the reinvestment ratio and use?
CFO/ Cash Paid for Long-Term Assets
Ability to acquire assets with operating cash flow
What is the debt payment ratio and use?
CFO/ Cash Paid for Long-Term Debt Repayment
Ability to pay debts with operating cash flows
What is the dividend payment ratio formula and use?
CFO/ Dividends Paid
ability to pay dividends with operating cash flows
What is the investing and financing ratio formula and use?
CFO/ Cash Outflows for Investing and Financing Activities
ability to acquire assets, pay debts, and make distributions to owners
What are non-cash charges?
A write down or accounting expense that does not involve a cash payment (line items for things like depreciation, amortization, unrealized gains & losses, bad debt, and etc.
What is capital expenditure?
Funds used by company to acquire, upgrade, maintain physical assets such as property, plants, buildings, technology, equipment
What is the difference between the cash flow statement and the income statement in terms of revenue recognition?
cash flow statement: reflects the receipt of cash, regardless of when the revenue was earned
income statement: recognizes revenue when it is earned, regardless of when it is received
What all does operating cash flow include?
Operating cash flows = Cash received from customers – (Cash paid to suppliers + Cash paid to employees + Cash paid for other operating expenses + Cash paid for interest + Cash paid for income taxes)
