Mastering the Cash Flow Statement & Free Cash Flow CFA ...
Mastering the Cash Flow Statement & Free
Cash Flow
CFA? Levels I & II
Jonathan.bone@kaplan.co.uk
Financial Reporting and Analysis
LOS 27.a Compare/Classify: CFAI pg 253 Schweser pg 109
Understanding the Cash Flow Statement
Importance of Cash Flow Statement
Net income from accrual accounting does not tell us about the sources and uses of cash to meet liabilities and operating needs
The statement of cash flows has three components under both IFRS and US GAAP:
Cash provided or used by operating activities
Cash provided or used by investing activities
Cash provided or used in financing activities
CFA LEVEL I 2013
?2012 Kaplan Financial Limited
1
LOS 27.c Contrast: CFAI pg 255 Schweser pg 111
Understanding the Cash Flow Statement
U.S. GAAP vs. IFRS
U.S. GAAP IAS GAAP (SFAS 95) (IAS 7)
Interest received CFO
CFO or CFI
Interest paid
CFO
CFO or CFF
Dividends received CFO
CFO or CFI
Dividends paid CFF
CFO or CFF
Taxes paid
CFO
CFO or CFI & CFF
Bank overdraft
CFF
*
* Considered part of cash and cash equivalents
LOS 27.d Distinguish/Describe: CFAI pg 256 Schweser pg 112
Understanding the Cash Flow Statement
Statement of Cash Flow:
Direct vs. Indirect Method
Direct vs. indirect method refers only to the calculation of CFO, the value of CFO is the same for both methods; CFI and CFF are unaffected
Direct method: Identify actual cash inflows and outflows; e.g., collections from customers, amount paid to suppliers
Indirect method: Begin with net income and make necessary adjustments to get operating cash flow
CFA LEVEL I 2013
?2012 Kaplan Financial Limited
2
LOS 27.e Describe: CFAI pg 266 Schweser pg 114
Understanding the Cash Flow Statement
Linkages Between Statements
Last year's
balance sheet Accounts Receivable `T' Account
Amount B/Fwd Sales
18,000
198,000 Cash collections 200,000
This year's income statement
218,000
20,000 Amount C/Fwd
218,000
This year's balance sheet
-5
LOS 27.f Describe: CFAI pg 267 Schweser pg 115
Understanding Cash Flow Statements
Cash Inflows and Outflows
General rules regarding increases and decreases in balance sheet items over time:
Increase Decrease
Assets
outflow inflow
Liabilities & Equity inflow outflow
e.g.: An increase in AR or inventory uses cash
An increase in payables generates cash
Adjust net income for these changes (indirect)
CFA LEVEL I 2013
?2012 Kaplan Financial Limited
3
LOS 27.f Describe: CFAI pg 267 Schweser pg 115
Understanding the Cash Flow Statement
Ecclestone Industries--Example
Ecclestone Industries has the following income statement for 20X9 and balance sheets for 20X8 and 20X9. You are to construct the statement of cash flows using the indirect method.
Additional information: Equipment was purchased for $50,000 Ecclestone has a tax rate of 40%
LOS 27.f Describe: CFAI pg 267 Schweser pg 115
Understanding the Cash Flow Statement
Income Statement for Year to 31 December 20X9
$
$
Sales revenue
200,000
Expenses:
Cost of goods sold 80,000
Salaries
10,000
Depreciation
14,000
Interest
1,000
105,000
95,000
Gain from sale of PPE
20,000
Pre-tax income
115,000
Provision for taxes
40,000
Net income
75,000
CFA LEVEL I 2013
?2012 Kaplan Financial Limited
4
LOS 27.f Describe: CFAI pg 267 Schweser pg 115
Understanding the Cash Flow Statement
Ecclestone Balance Sheet Data
Balance Sheets
Current assets Cash Accounts receivable Inventory
Non-current assets Gross PPE Accum. Depr.
20X8 $
20X9 $
18,000 18,000 14,000
66,000 20,000 10,000
282,000 312,000 (80,000) (84,000)
Total Assets
252,000 324,000
LOS 27.f Describe: CFAI pg 267 Schweser pg 115
Balance Sheets
Current liabilities Accounts payable Salaries payable Interest payable Taxes payable Dividends payable
Noncurrent liabilities Bonds Deferred taxes
Stockholders' equity Common stock Retained earnings
Total Liabilities & Equity
Understanding the Cash Flow Statement
20X8 $
20X9 $
10,000 16,000
6,000 8,000 2,000
18,000 9,000 7,000
10,000 12,000
20,000 30,000
30,000 40,000
100,000 60,000
80,000 118,000
252,000 324,000
CFA LEVEL I 2013
?2012 Kaplan Financial Limited
5
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