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Cash collections are the principle components of CFO. These are the actual cash received
during the accounting period from customers. They are defined as:
Formula 6.7
Formula 6.8
Cash payments for purchases = cost of goods sold + increase (or - decrease) in inventory +
decrease (or - increase) in accounts payable
Cash payment for operating expenses is the cash outflow related to selling general and
administrative (SG&A), research and development (R&A) and other liabilities such as wage payable
and accounts payable. It is defined as:
Formula 6.9
Cash payments for operating expenses = operating expenses + increase (or - decrease) in
prepaid expenses + decrease (or - increase) in accrued liabilities
Cash interest is the interest paid to debt holders in cash. It is defined as:
Formula 6.10
Cash interest = interest expense - increase (or + decrease) interest payable + amortization of
bond premium (or - discount)
Cash payment for income taxes is the actual cash paid in the form of taxes. It is defined as:
Formula 6.11
method.
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Candidates must know the following:
Though the methods used di er, the results are always the same.
CFO and CFF are the same under both methods.
There is an inverse relationship between changes in assets and changes in cash flow.
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