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Chapter 1 - 5 Chapter 6 - 10 Chapter 11 - 15 Chapter 16 - 17

6. Financial Statem ents

7. Financial Ratios

8. Assets

9. Liabilities

10. Red Flags

6.20 Cash Flow Statement Basics

6.21 Cash FlowComputations - Indirect Method

6.22 Cash Flow Computations - Direct Method

6.23 Free Cash Flow

6.24 Management Discussion and Analysis & Financial Statement

Footnotes

Financial Statements - Cash Flow Statement

CFA Level1

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BasicsStatement of Cash FlowStatement of Cash FlowThe statement of cash flow reports the impact of a firm's operating, investing and financialactivities on cash flows over an accounting period. The cash flow statement is designed toconvert the accrual basis of accounting used in the income statement and balance sheet backto a cash basis.

The cash flow statement will reveal the following to analysts:

1. How the company obtains and spends cash2. Why there may be differences between net income and cash flows3. If the company generates enough cash from operation to sustain the business4. If the company generates enough cash to pay off existing debts as they mature5. If the company has enough cash to take advantage of new investment opportunities

Segregation of Cash FlowsSegregation of Cash FlowsThe statement of cash flows is segregated into three sections:

1. Operating activities2. Investing activities3. Financing activities

1.1. Cash Flow from Operating Activities (CFO) Cash Flow from Operating Activities (CFO)

CFO is cash flow that arises from normal operations such as revenues and cash operatingexpenses net of taxes.

This includes:

Cash inflow (+)1. Revenue from sale of goods and services2. Interest (from debt instruments of other entities)

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3. Dividends (from equities of other entities)Cash outflow (-)

1. Payments to suppliers2. Payments to employees3. Payments to government4. Payments to lenders5. Payments for other expenses

2.2. Cash Flow from Investing Activities (CFI) Cash Flow from Investing Activities (CFI) CFI is cash flow that arises from investment activities such as the acquisition or disposition of current and fixed assets.

This includes:

Cash inflow (+)1. Sale of property, plant and equipment

2. Sale of debt or equity securities (other entities)3. Collection of principal on loans to other entities

Cash outflow (-)1. Purchase of property, plant and equipment2. Purchase of debt or equity securities (other entities)3. Lending to other entities

3.3. Cash flow from financing activities (CFF) Cash flow from financing activities (CFF) CFF is cash flow that arises from raising (or decreasing) cash through the issuance (orretraction) of additional shares, short-term or long-term debt for the company's operations.This includes:

Cash inflow (+)1. Sale of equity securities2. Issuance of debt securities

Cash outflow (-)1. Dividends to shareholders

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Next: Cash Flow Computations - Indirect Method

2. Redemption of long-term debt3. Redemption of capital stock

Reporting Noncash Investing and Financing TransactionsReporting Noncash Investing and Financing TransactionsInformation for the preparation of the statement of cash flows is derived from three sources:

1. Comparative balance sheets2. Current income statements3. Selected transaction data (footnotes)

Some investing and financing activities do not flow through the statement of cash flowbecause they do not require the use of cash.

Examples Include:

Conversion of debt to equityConversion of preferred equity to common equityAcquisition of assets through capital leasesAcquisition of long-term assets by issuing notes payableAcquisition of non-cash assets (patents, licenses) in exchange for shares or debtsecurities

Though these items are typically not included in the statement of cash flow, they can befound as footnotes to the financial statements.

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CAREER EDUCATION & RESOURCES

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What it Takes to be a Financial AnalystA financial analyst researches companies and economic conditions to makebusiness, sector and industry recommendations.


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Financial Planner: Career Path & QualificationsLearn what education and certifications you need to become a financialplanner, as well as the future prospects and earnings potential for financialplanners.


Where to Find Non-Profit Finance Jobs

The non-profit sector offers a stable selection of jobs for those who seekother types of fulfillment from their jobs than just purely financial.

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Portfolio Manager: Career Path & QualificationsLearn about the basic requirements for getting hired as a portfolio manager,and discover how most professionals in the field rise into the position.

YOUR PRACTICE

4 Professional Associations Advisors Should JoinThese four professional organizations are among the most respected andwell known in the industry.

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Learn more about the career options available to financial data analysts, anddetermine whether the profession is a good match for you.

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Personal Financial AdvisorProfessionals who help individuals managetheir finances by providing ...

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