How to Really Study the Cash Flow Statement

Cash Flow Statement

black guy studying cash flow statementThe cash flow statement provides information:

  • about a company’s cash receipts and cash payments during an accounting period
  • about a company’s operating, investing and financing activities
  • about the impact of accrual accounting events on cash flows
  • to assess the firm’s liquidity, solvency and financial flexibility

An analyst can use the the statement of cash flow to determine whether:

  • regular operations generate enough cash to sustain business
  • enough cash is generated to pay off existing debts
  • firm is likely to need additional financing
  • unexpected obligations can be met
  • firm can take advantage of new business opportunities as they arise

The cash flow statement is divided into 3 classifications under GAAP (generally accepted accounting principals) in the US

  • cash flow from operating activities (CFO) consists of cash resulting from transactions that affect a firm’s net income
  • – cash from customers, cash to suppliers and employees, other expenses, trading securities, interest paid and received, dividends received, taxes
  • cash flow from investing activities (CFI) consist of cash resulting from acquisitions or disposal of long term assets and certain investments
  • – fixed assets, equity and debt investments,
  • cash flow from financing activities (CFF) consist of cash resulting from transactions affecting a firm’s capital structure
  • – debt and equity financing, principal paid on debt, treasury stock, dividends paid

GAAP vs IFRS

Topic IFRS GAAP
interest received operating or investing operating
interest paid operating or financing operating
dividends received operating or investing operating
dividends paid operating or finance financing
bank overdrafts considered part of cash equivalents not considered part of cash and cash equivalents and classified as financing
taxes paid generally operating, but a portion can be allocated to investing or financing if it can be specifically identified with these categories operating

Noncash Activities

  • a noncash activity is any transaction that does not involved an outflow or inflow of cash
  • – conversion of bonds to stock, stock splits, etc.
  • noncash transactions must be disclosed in either a footnote or supplemental schedule to the cash flow statement
  • analyst should incorporate noncash transactions into analysis of past and current performance and include their effects in estimating future cash flows
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shakaama

Ex law school student. I was kicked out for revealing I had a heart actually beating inside. I used to be in a modern dance company. I'm working on my 7 miracles to be proclaimed a saint by the pope. #1 is really hard, but once i get over that hump the other 6 will be a cinch.

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