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    Pedro Correia
    The document discusses various aspects of cash flow statements including: 1) Operating, investing, and financing activities are the three main classifications on the statement of cash flows. Operating activities relate to core business operations while investing and financing activities relate to long-term assets and capital. 2) There are two main methods for presenting operating cash flows - the direct method shows cash receipts/payments, while the indirect method reconciles net income to operating cash flows. 3) Non-cash transactions are not included on the statement of cash flows but must be disclosed separately. Preparing the statement involves determining cash changes, cash flows, and disclosing non-cash items. 4) Free cash flow metrics measure

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    The document discusses various aspects of cash flow statements including: 1) Operating, investing, and financing activities are the three main classifications on the statement of cash flows. Operating activities relate to core business operations while investing and financing activities relate to long-term assets and capital. 2) There are two main methods for presenting operating cash flows - the direct method shows cash receipts/payments, while the indirect method reconciles net income to operating cash flows. 3) Non-cash transactions are not included on the statement of cash flows but must be disclosed separately. Preparing the statement involves determining cash changes, cash flows, and disclosing non-cash items. 4) Free cash flow metrics measure

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    The document discusses various aspects of cash flow statements including: 1) Operating, investing, and financing activities are the three main classifications on the statement of cash flows. Operating activities relate to core business operations while investing and financing activities relate to long-term assets and capital. 2) There are two main methods for presenting operating cash flows - the direct method shows cash receipts/payments, while the indirect method reconciles net income to operating cash flows. 3) Non-cash transactions are not included on the statement of cash flows but must be disclosed separately. Preparing the statement involves determining cash changes, cash flows, and disclosing non-cash items. 4) Free cash flow metrics measure

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    Download as docx, pdf, or txt
    41 views5 pages

    Far Chapter 5

    Uploaded by

    Pedro Correia
    The document discusses various aspects of cash flow statements including: 1) Operating, investing, and financing activities are the three main classifications on the statement of cash flows. Operating activities relate to core business operations while investing and financing activities relate to long-term assets and capital. 2) There are two main methods for presenting operating cash flows - the direct method shows cash receipts/payments, while the indirect method reconciles net income to operating cash flows. 3) Non-cash transactions are not included on the statement of cash flows but must be disclosed separately. Preparing the statement involves determining cash changes, cash flows, and disclosing non-cash items. 4) Free cash flow metrics measure

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    Cash flows
    Classification of activities on the statemnent of cash flows

    Operating activities: Deliver or produce goods for sale and provide services. Examples:

    • Receive cash from customers


    • Pay cash to suppliers
    • Pay cash for operating expenses.

    In the balance sheet, changes in inventory and changes in receivables/ payables are all part
    of operating cash flow activities
    Examples of operating cash flows:

    Investing activities: Buy or sell long-term assets and other investments.


    Examples:
    • Property, plant, and equipment (PP&E)
    • Other companies’ securities (that are not cash equivalents)
    In the balance sheet the changes in non-current assets are all part of the investing cash
    flows
    Financing activities: Financing activities: Obtain or repay capital.
    Examples:
    • Borrow from creditors and repay the principal
    • Issue or repurchase stock
    • Pay dividends

    Indirect vs direct method for presenting operating cash flow

    Indirect method: This method starts with net income and converts it to OCF by adjusting for
    items that were used to calculate net income but did not affect cash
    Arguments for:
     Clearly shows the reasons for differences between net income and operating cash
    flows.
     Mirrors forecasting approach that begins with a forecast of income, then derives
    cash flows.
     IFRS and Us GAAP permit

    Direct method: This method draws data from the income statement using cash receipts and
    cash disbursements from operating activities. The net of the two values is the operating
    cash flow.
    Arguments for:
    • Provides information on the specific sources of operating cash receipts and payments.
    • Does not net.
    IFRS and US GAAP encourage, but in the latter, it requires a reconciliation of net income
    cash flow from operating activities

    ´
    Classification of cash flows under IFRS vs US GAAP

    Noncash investing and financing activities

    • Noncash transaction: Any transaction that does not involve an inflow or outflow of cash
    (e.g., exchange of one no-monetary asset for another).
    • Not incorporated in the cash flow statement.
    • Must be disclosed.

    Preparation of statement of cash flows: steps

    Step 1: Determine the change in cash


    Step 2: Determine the net cash flows from operating activities- Use both the current year’s
    income statement and information on current assets and liabilities from the comparative
    balance sheets
    Step 3: Determine the cash flows from investing and financing activities- Examine all other
    changes in the balance sheet.
    Step 4: Include summary of net increase (decrease) in cash, cash at the beginning and cash
    at the end
    Step 5: Disclose any significant noncash transactions separately at the bottom of the
    statement.

    Free Cash Flow

    Free Cash Flow to the Firm (FCFF): Cash flow available to the company’s suppliers of capital
    (debt and equity).

    • After all operating expenses (including taxes) have been paid.


    • After all operating investments have been made for fixed capital and working capital

    Free cash flow to equity (FCFE): cash flow available to the company’s common stockholders.
     After all operating expenses( including taxes) have been paid
     After all borrowing costs ( principal and interest) have been paid
     After all operating investments have been made for fixed capital and working capital
    Compute FCFF

    NOPAT: net operating profit after tax


    Capex: money that is spent to acquire, repair, update, or improve a fixed company asset,
    such as a building, business, or equipment
    NWC: difference between a business' short-term assets and its short-term debts and
    liabilities

    Compute FCFE

    Cash flow performance ratios

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