(R23) Understanding Cash Flow Statements

Question 1

Where does interest and dividends paid and received show up on the cash flow statement for IFRS and GAAP?

Answer 1

IFRS: see image

GAAP: all operating except dividends paid goes to financing

Question 2

What is the goal of the cash flow statement?

Answer 2

Reconcile beginning cash with ending cash

Question 3

Cash flow from operations

Answer 3

Change in cash flow from day to day activities

Question 4

Cash Flow from Investing

Answer 4

Purchase/sale of long-term assets and other investments

Question 5

Cash flow from financing activities

Answer 5

obtaining and repaying capital

Question 6

Direct Method vs. Indirect Method for Cash Flow Statement

Answer 6

Direct Method: Each line item on the income statement is converted to cash

Indirect Method: Net income is adjusted for the non-cash items, non-operating items, and changes in working capital accounts (this format starts with net income)

Question 7

Formula to calculate cash received from customers

Answer 7

AR_beg + Revenue - cash rec. from customers = AR_end

Question 8

Formula to calculate cash paid for suppliers

Answer 8

AR_beg + purchases - cash paid = AR_end

Purchases = Inv_end + COG - Inv_beg

Question 9

Uses of cash

Answer 9

Increase in asset accounts

Decrease in liability accounts

Question 10

Sources of cash

Answer 10

Decrease in assets

Increase in liabilities

Question 11

Common size cash flow statement (2 approaches)

Answer 11

1. Each line line of inflow/outflow as a % of total inflow/outflow
2. Express each line item as a percentage of net revenue

Question 12

Performance and Coverage cash flow ratios

Answer 12

Cash flow performance ratios, such as cash return on equity or non-assets, and cash coverage ratios, such as debt coverage or cash interest coverage, provide information about the firm’s operating performance and financial strength. (Each ratio has CFO as numerator)