Hey, I recently made a post regarding to the Income Statement, if anyone were able to provide me with a template to truly understand it and that was greatly helpful and enhanced my understanding for multiple topics. I would like to kindly ask for the same thing regarding to the CF statement.Does anyone of you have a good summary over the different items on the Cash Flow Statement and where they show up? Things to look out for etc. Thanks a lot for the help.
Hey- if you learn to *love* it, then you will truly understand it.
#TheMoreYouKnow
Pick a public company you like and upload their 10K filings. Take a look at the income statement and try to understand it yourself, and once you do try to forecast their projected earnings by downloading the data to a spreadsheet.
That’s the best way to learn it.
Agreed. I was in the same situation until I started researching companies. After you do 2 or 3 companies, you really start to see how the financial statements connect.
Thank you for the advice. I will make sure to do that as extra practice to learn to better understand the CF-Statement. But is there any general way of setting it up for the CFA exam?
I have been using the below model for most questions related to the Income Statement and I have found that very helpful. If there is any similar model I can use for the CF-statement related to questions in the CFA Ciricilium that would be very helpful. Your input is much appreciated as I find understanding the fundamentals very helpful to my progression. Sales -COGS =Gross Profit
-SGA
=EBITDA
-Depreciation and Amortization
=EBIT
-Interest Expense
=EBT
-Taxes
= Net Income
Indirect method
- NI
- ± Non Cash adjustments (eg.depreciation)
- Increase/Decrease in short term A/L positions
Note that increase in Liability positions will increase CFO, decrease in liability positions will decrease CFO because is assumed that decrease caused cash outflows.
Increase in Asset positions will cause a decrease in CFO and vice versa based on same assumption as above.
- Net CFO Total
- Purchase of PPE
- Proceeds from selling PPE
- Purchase of financial assets*
- Proceeds from selling financial assets*
- Net CFI Total
- Proceeds from issuing stock/bonds/notes and other source of financing
- Principal debt payments
- Dividends paid*
- Interest paid*
- Net CFF Total
* Be aware on different treatment of mentioned positions among standards (eg. Interest paid may be CFO or CFF under IFRS, investment to financial assets depends on category of FA. Stocks held for trading are usually part of CFO rather than CFI).
Direct method (recommended upon IFRS)
Differs only in CFO part
Stars directly from proceeds, not from adjusted NI.
- Cash paid to all vendors
- Cash received from customers
- Cash from other operations
- Net CFO Total
CFI and CFF methodology is same as under indirect method.
Thanks a lot for your reply Flashback.
Is this the correct way of think of it? CFO ( Cash Flow from Operations)
Indirect Method (Can be used under US GAAP and IFRS):
CFO = NI + NCC - WCinv (+ Div paid + Interest paid)
- 1.a. WCinv = Change in working capital accounts and we ignore cash, investments and short term portion of D.
- 1.b. If Dividend and Interest paid is defined as an operating cash flow we add that back like shown in the () above.
- 1.c. Is this correct?
Direct Method (Preffered under IFRS)
CFO = Cash from other operations + Cash received from customers - cash paid to vendors
- 1.d. Where do I find this information? Will it be in notes in the financial statement or can I find it from the Balance Sheet?
CFI (Cash Flow from Investing) - Same under direct and indirect method.
CFI = Proceeds from sale of PPE + Sale of Financial Assets - Purchase of PPE - Purchase of Financial Assets.
- 2.a.Can FCinv be used in this calculation? FCinv defined as: CAPEX = Change in Net A + Dep = Change in Gross A.
- 2.b.If we purchase a stock and intent to hold it for trading, will then be included in current A under WCinv instead of being included here?
CFF (Cash Flow from Financing) - Same under direct and indirect method.
CFF = (Proceeds from issuing stocks/bonds/notes etc) - Principal Debt payments - (Dividends paid and Interest paid)
- 3.a. if Dividend and Interest paid is defined as a financing cash flow we deducted them to get CFF?
- 3.b. am I correct to + (Dividend and Interest) under CFO if we are defining it as a Operating CF and do - ((Dividends paid and Interest paid) if it is under CFF? Or have I missunderstood something here?
Thanks a lot for your kind help. It is much appreciated and greatly helpful for my study progression.
Correct pay attention to different treatment between USGAAP and IFRS. Changes in WC may have positive or negative prefix within one period. CF Statement is always made upon changes in one period, most likely annually, thus changes in WC beginning and ending balances within period.
Well. In real life situation is hard to find unless you have certain accounts balances with all transactions within period.
I think FCInv can be used as changes in CAPEX within period. Pay attention on non cash changes which should be added back (eg. revaluation under IFRS, impairment under both standards). Stock held for trading according to both standard should be CFO not CFI. Standards do not distinguish between ordinary inventory trading (such as potato or banana trading) and stock trading if short term trading is only purpose.
If you have decided to use indirect method and classify dividends paid and interest paid as CFO you should not deduct them again from CFF again. Each transaction should be shown in CF only once as it happened.
Great, thank you. I feel I have a good understanding of how to calculate the CFO now. And the reason to why we are adding back these items to the CFO is to find the actual CF from our operations if I have understood correctly.
So in terms of exam preparation, it is more about remembering the formula and the input the formula is likely to be present
When you say Stocks held for trading should be CFO, you mean they are included as part of Current A,which again is part of WCinv?
Will e.g. impairment effect the formula in the following way?
CFI = Proceeds from sale of PPE + Sale of Financial Assets - Purchase of PPE - Purchase of Financial Assets - impairment.
What I mean here is if I have classified Dividends and Interest paid as an CFF and not a CFO, should I then deduct in the CFF formula instead of adding it back in the CFO formula?
CFF = (Proceeds from issuing stocks/bonds/notes etc) - Principal Debt payments - (Dividends paid and Interest paid)
Thank you for great explanations.
In terms of CFA, you are mostly required to interpret various FS positions and its trending and structural changes, not to prepare financial statements.
Correct. Stock held for trading are part of Company’s current asset and thus part of WCInv.
If you use algebra for each CF position, IMO, Impairments should be added back thus prefix should be + not a -. But impairment reversals are also permitted under IFRS so end of formula might be + impairment - impairment reversals. Same in CFO by recording the impairments of inventory. Both is a key importance by applying of indirect method since by preparing a CF statement upon direct method, you simply follow all cash transactions and non cash transactions are not recorded on CF account. However this is irrelevant for the purpose of CFA exam.
Thanks a lot for your help with both the income statement and the cash flow statement. Understanding the basics well has been tremendously helpful, thank you!
You are welcome.