cash flow based accruals ratio

CFA Level II
#1

so for cash flow based accruals, we use: [NI - CFO - CFI] / [(NOA end + NOA begin ) / 2] Why is CFF excluded here?

#2

Mmm think about this differently…

As with NOA, what you want here is to differentiate the accruals from the actual cashflow… so you eliminate the Operating Cashflow from the Net Income (in order to get the accruals)… next, if you want to compare a company A that uses IFRS vs company B that uses US. GAAP, remember that in one you can report interest expense as CFO and in other as CFI or CFO… in order to mitigate this issue when calculating the NOA from the cashflow statement you just eliminate CFI also… so NI - CFO - CFI will give you the accruals and will be more easily comparable with IFRS vs GAAP…

Regards from Mexico,

Jorge

2 Likes
#3

thanks

#4

Hi Jorge,

thanks for your answer. Basically you are saying that (i) the objective of CF acrrual ratio is to differentiate accrual from cash (totally ok with that) and (ii) that the inclusion of CFI help make sure that the interest expense -CFO or CFI depending on GAAP or IFRS- are taken into account (not ok with that).

Given that the CFI will be composed by far many more elements than interest expense only (i.e. cash in from disposal or cash out from acquisition), I doubt that the interest expense might be the only reason to include the CFI…

Regarding the CFF I have absolutely not any clue why it is not included…

Franck from Paris