Understanding Cash Flow Statements

Question 1

What do cash flows from operating activities consist of?

Answer 1

• The inflows and outflows of cash resulting from transactions that affect a firm’s net income.
• Operating activities typically relate to the firm’s current assets and current liabilities

Question 2

What do cash flows from investing activities (CFI) consists of?

Answer 2

1. The inflows and outflows of cash resulting from the acquisition or disposal of long-term assets and certain investments.
2. Typically relates to noncurrent assets

Question 3

What do cash flows from financing activities (CFF) consists of?

Answer 3

1. The inflows and outflows of cash resulting from transactions affecting a firm’s capital structure, such as issuing or repaying debt and issuing or repurchasing stock.
2. Typically relates to noncurrent liabilities and equity

Question 4

Are noncash investing and financing activities, such as taking on debt to the seller of a purchased asset, reported in the cash flow statement?

Answer 4

NO!, they are not reported in the cash flow statement but must be disclosed in the footnotes or a supplemental schedule.

Question 5

What cash flow category do interest, dividends and taxes fit into under US GAAP?

Answer 5

• Financing: dividends paid
• Operating: Interest paid, interest received, and dividends received, and all taxes paid.

Question 6

What cash flow category do interest, dividends and taxes fit into under IFRS?

Answer 6

1. Operating or Financing: Dividends and interest paid
2. Operating or Investing: Interest and dividends received
3. Operating: Taxes paid (unless arising from an investing or financing transaction.)

Question 7

Describe the direct method of presenting CFO:

Answer 7

Under the direct method of presenting CFO, each line item of the accrual-based income statement is adjusted to get cash receipts or cash payments.

Question 8

What is a major advantage of the direct mathod of presenting CFO?

Answer 8

It presents clearly the firm’s operating cash receipts and payments.

Question 9

Describe the indirect method of presenting CFO:

Answer 9

• Begins with net income and adjusts it for gains or losses related to investing or financing cash flows, noncash charges to income, and changes in balance sheet operating items.

Question 10

What is an advantage of using the indirect method to present CFO?

Answer 10

• Focuses on the differences between net income and operating cash flow.
• Provides a useful link to the income statement when forecasting future operating cash flow.

Question 11

What are “cash collections from customers”?

Answer 11

Sales adjusted for changes in receivables and unearned revenue.

Question 12

What is “cash for imputs”?

Answer 12

COGS adjusted for changes in inventory and accounts payable.

Question 13

What are “cash operating expenses”?

Answer 13

SG&A adjusted for changes in related accrued liabilities or prepaid expenses.

Question 14

What is “cash interest paid”?

Answer 14

Interest expense adjusted for the change in interest payable.

Question 15

What are “cash taxes paid”?

Answer 15

Income tax expense adjusted for changes in taxes payable and changes in deferred tax assets and liabilities.

Question 16

How is CFI calculated?

Answer 16

By determining the changes in asset accounts that result from investing activities. The cash flow from selling an asset is its book value plus any gain on the sale (or minus any loss on the sale).

Question 17

How is CFF calculated?

Answer 17

The sum of net cash flows from creditors (new borrowings minus principal repaid) and net cash flows from shareholders (new equity issued minus share repurchases minus cash dividends paid).

Question 18

How is an indirect cash flow statement converted into a direct one?

Answer 18

By adjusting each income statement account for changes in associated balance sheet accounts and by eliminating noncash and non-operating items.

Question 19

What is FCFF?

Answer 19

• Free cash flow to the firm
• The cash available to all investors, both equity owners and debt holders.

Question 20

What is the expanded calculation for free cash flow to the firm?

Answer 20

FCFF = net income + noncash charges + [interest expense × (1 − tax rate)] − fixed capital investment − working capital investment.

Question 21

What is the expanded calculation for free cash flow to the firm?

Answer 21

FCFF = CFO + [interest expense × (1 − tax rate)] − fixed capital investment.

Question 22

What is FCFE?

Answer 22

• Free cash flow to equity
• The cash flow that is available for distribution to the common shareholders after all obligations have been paid.

Question 23

What is the calculation for FCFE?

Answer 23

FCFE = CFO − fixed capital investment + net borrowing