R23 Understanding Cash Flow Statements 01

FRA Reading #23 - Understanding Cash Flow Statements

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1. Sources for the cash flow statement: changes in balance sheet 26. what is required to be disclosed under IFRS: interest and
accounts taxes must be disclosed separately in the cash flow statement
2. Cash flow from operating activities: consists of inflows and 27. change in cash: operating cash flows + investing cash flows +
outflows of cash resulting from transactions that affect the financing cash flows
firms net income 28. ending cash balance: Change in cash + Beginning cash
3. cash flow from investing activities: consists of the inflows and balance
outflows of cash resulting from the acquisition or disposal of 29. what do operating activities relate to?: firm's current assets
long-term assets and certain investments and current liabilities
4. cash flow from financing activities: consists of the inflows and 30. what do investing activities relate to?: noncurrent assets
outflows of cash resulting from transactions affecting a firm's
31. what do financing activities relate to?: noncurrent liabilities
capital structure
and equity
5. dividends paid: financing activity
32. what is the relationship between changes in assets and
6. Acquisition of debt & equity investments: investing activity changes in cash flows: inverse
7. loans made to others: investing activity 33. decrease in asset: source of cash
8. income from investments: operating activity 34. increase in asset: use of cash
9. principal amounts borrowed from others: financing activities 35. what is the relationship between changes in liabilities and
10. interest paid: operating activity changes in cash: direct
11. what is not reported in the cash flow statement: noncash 36. increase in liability: source of cash
investing and financing activities 37. decrease in liability: use of cash
12. What allows more flexibility in classification of cash flows: 38. when using direct method what should you ignore:
IFRS depreciation expense
13. Under IFRS how are interest and dividends received 39. what kind of charge is depreciation: non cash
classified: operating or investing activities
40. if assets were sold during a period use this formula: cash
14. Under IFRS how dividends paid and interest paid classified: paid for new asset = ending gross assets + gross cost of old
operating or financing activities assets sold - beginning gross assets
15. How does tax differ between GAAP and IFRS: GAAP all 41. cash flow from asset that has been sold: cash from asset sold
taxes are reported as operating = book value of the asset + gain on sale
IFRS taxes reported as operating unless the expense is
42. what is technically a cash flow to creditors but included in
associated with an investing or financing transaction
CFO under GAAP: interest paid
16. What methods are permitted under GAAP and IFRS: Direct
43. net cash flows from creditors =: new borrowings - principal
and indirect methods
amounts repaid
17. what method is encouraged by both IFRS and GAAP: direct
44. net cash flows from shareholders =: new equity issued - share
18. What is different between the direct and indirect method: repurchases - cash dividends paid
presentation of operating activities
45. what do we add back to net income in the indirect method:
19. What does the direct method do: converts and accrual basis depreciation and amortization
income statement into a cash basis one
46. what do we subtract from net income in the indirect
20. what does the indirect method do: net income is converted to method: gains on the disposal of assets
operating cash flow by making adjustments for transactions
47. what do we adjust net income by in the indirect method:
that affect net income but are not cash transactions
changes in balance sheet accounts
21. what is the starting point for the indirect method: net income
48. Steps for calculating CFO (indirect method): 1) net income
22. what is the starting point for direct method: revenues 2) add or subtract changes to balance sheet operating
adjusted to show cash received form customers accounts
23. Are the amounts under direct and indirect different: no, 3) add back all noncash charges to income and subtract all
they're the same noncash components of revenue
24. Why is direct better?: provides more information - receipts 4) subtract gains or add losses that resulted from financing or
and payments investing cash flows
25. What is required under GAAP (direct )?: disclose adjustments 49. what does operating cash flow provide a check on: quality of
necessary ti reconcile net income a firm's earnings
 R23 Understanding Cash Flow Statements 02

50. what does the common size cash flow statement show: each line as % of revenue
51. what is free cash flow: measure of cash that is available for discretionary purposes
52. free cash flow to the firm: Cash available to all investors, both equity owners and debt holders
53. FCFF formula: FCFF = NI + NCC + [Int X (1 - tax rate)] - FCInv - WCInv
54. Free Cash Flow to Equity: Cash flow that would be available for distribution to common shareholders
55. free cash flow to equity formula: ;
= Cash Flow from Operations - Fixed Capital Investment + Debt Issued - Debt Repaid
56. cash flow to to revenue: CFO / net revenue
57. cash return on assets: CFO / avg total assets
58. cash return on equity: CFO / average total equity
59. cash to income: CFO / operating income
60. cash flow per share: (CFO - preferred dividends) / weighted average number of common shares
61. debt coverage ratio: cfo / total debt
62. interest coverage ratio: (CFO + interest paid + taxes paid) / interest paid
63. reinvestment ratio: CFO / cash paid for long-term assets
64. debt payment ratio: CFO / cash long-term debt repayment
65. dividend payment ratio: CFO / dividends paid
66. investing and financing ratio: CFO / cash outflows from investing and financing activities
67. taxes on income must be separately disclosed on which reporting standard: both IFRS and GAAP
68. gain or loss on sale: selling price - book value
69. book value: historical cost - accumulated depreciation