Cash Flow Statement

Question 1

Structure of Cash Flow Stement

Answer 1

1. Cash from operations
2. Cash from investing
3. Cash from financing

Question 2

Cash flows from operations

Answer 2

Net income Starting point (indirect method)
+ Depreciation & amortization –After net income, the second line is usually the addback of D&A, which is embedded in COGS and operating expenses on the I/S thus reducing net income
-Increases in working capital assets (i.e. A/R, inventory, prepaids, other current assets)
+ Increases in working capital liabilities (i.e. A/P, accrued expenses, other current liabilities)
+/-Other items
+ Impairments
-Gains on sale of assets
+ Stock based compensation
-Increases in deferred tax assets
+ Increases in deferred tax liabilities
= Cash flows from operations

Question 3

Cash from investing (CFI)

Answer 3

Def: The CFI section tracks additions and reductions to fixed assets and investments during the year (primarily long-term assets):

Items:

• Capital expenditures (cash outflow)
• Purchases of intangible assets (cash outflow)
• Asset sales (cash inflow)
• Purchases and sales of investments (cash outflow/inflow)

Question 4

Cash from financing(CFF)

Answer 4

Def: The CFF section tracks changes in the company’s sources of debt and equity financing (primarily liabilities and equity items)

Items:

• Issuance / repayment of debt (cash inflow / outflow)
• Common stock issued / repurchased (cash inflow / outflow)
• Payment of common & preferred dividends (cash outflow)

Question 5

CFS as magnyfying glass

Answer 5

CFS identifies the year-over-year change of every B/S line item that affects cash

• CFO captures the impact oof retained earnings, current assets, and current liabilities (and D&A part of fixed assets)
• CFI captures the impact of longt-term assets
• CFF captures the impact of long term liabilities and equity