Cash Flows

• provides information beyond that available from income statement, based on accrual rather than cash, accouting

  cash flow statements
• provides information to asses the firm's liquidity, solvency and financial flexibility

  cash flow statement
• information from cash flow statements

  • company's cash receipts and cash payments during an accounting period
  • information about a company's operating, investing and financing activities
  • understanding the impact of accrual accounting events on cash flows
• analyst uses of cash flow statements

  • determine whether the regular operations generate enough cash to sustain the business
  • if enough cash is generated to repay existing debts as they mature
  • to see if the firm is likely to need additional financing
  • confirm if obligations can be met
  • establish if the firm can take advantage of new business opportunities as the arise
• Sources of Cash Flow Statement

  • income statement
  • changes in balance sheet accounts
• parts of cashflow statement

  • cash flows from operating activities
  • cash flows from investing activities
  • cash flows from financing activities
• also referred to as cash flows from operations or operating cash flow

  cash flows from operating activities
• consists of the inflows and outflows of cash resulting from transactions that affect net income

  cash flows from operating activities
• consists of the inflows and outflows of cash resulting from transactions from acquisition or disposal of long-term asset or certain investment

  cash flows from investing activities
• results from transactions affecting the company's structure

  cash flows from financing activities
• US GAAP CF Classification CFO Inflow

  cash collected from customers

  interest and dividends received

  sale proceeds from trading securities
• US GAAP CF Classification CFO Outflow

  cash paid to customers and suppliers

  cash paid for other expenses

  acquisition of trading securities

  interest paid on debt or leases

  taxes paid
• US GAAP CF Classification CFI Inflow

  sale proceeds from fixed assets

  sale proceeds from debt and equity investment

  principal received from loans made to others
• US GAAP CF Classification CFI Outflow

  acquisition of fixed assets

  acquisition of debt and equity investments

  loan made to others
• US GAAP CF Classification CFF Inflow

  principal amount of debt issued
• US GAAP CF Classification CFO Outflow

  principal paid on debt or leases

  payments to reacquire stock

  dividends paid to shareholders
• not reported in the cash flow statement since they do not result in inflows and outflows of cash

  noncash investing and financing activities
• noncash transactions must be disclosed in either a footnote or supplemental schedule to the cashflow statement and should be incorporated at the time of analysis of past and current performance and include their effects in estimating future cashflow
• IFRS allows more flexibility in the classification of cash flow
• IFRS treatment on Dividends paid

  Operating or Financing
• US GAAP treatment on Dividends paid

  Financing
• IFRS Treatment on Interest Paid

  Operating or financing
• US GAAP treatment on Interest Paid

  Operating
• IFRS treatment on Interest and Dividends received

  Operating or Investing
• US GAAP treatment on Interest and Dividends paid

  Operating
• IFRS treatment on income taxes paid

  operating unless associated with financing or investing transaction
• US GAAP treatment on income taxes paid

  operating
• methods of presenting cash flow

  • direct method
  • indirect method
• each line of accrual based on income statement is converted into cash receipts or cash payments

  direct method
• encouraged by both IFRS and US GAAP

  direct method
• net income is converted to operating cash flow by making adjustments for transactions that affect net income but are not cash transactions


  indirect method
• includes eliminating non-cash expense, non-operating items and changes in balance sheet accounts from accrual accounting events

  indirect method
• used by most firms

  indirect method
• direct method starting point

  revenues, adjusted to show cash received from customers
• indirect method starting point

  net income
• direct method provides more information while indirect method focuses on the difference between net income and operating cash flow
• under US GAAP, direct method presentation must disclose adjustments necessary to reconcile net income to cash flow operations, however, IFRS does not require any reconciliation
• payments for interest and taxes under US GAAP can be reported in the cash flow statement or disclosed in the footnotes while payments for taxes under IFRS must be disclosed separately in the cash flow statement under direct or indirect method
• cash flow statements reconcile the beginning and ending balances of cash over an accounting period
• how to calculate cash flow

  $(CFO+CFI+CFF=change in cash balance) +$$beginning cash balance=$$ending cash balance$