Library/CFA (Chartered Financial Analyst)/JuiceNotes 2024 Financial Statement Analysis CFA Level I/Analyzing Statements of Cash Flows I

Analyzing Statements of Cash Flows I

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Reporting Frameworks and Non-Cash Activities5 min

The analysis begins by identifying non-cash investing and financing activities, such as exchanging debt for equity or acquiring assets via direct liability assumption. Since these do not involve cash turnover, they are excluded from the main body of the Cash Flow Statement and must be disclosed in the footnotes. The chapter then outlines the divergence between IFRS and US GAAP. US GAAP rigidly classifies interest paid, interest received, and dividends received as Operating Cash Flow (CFO), while dividends paid are Financing (CFF). In contrast, IFRS allows entities to classify these items based on their function, providing choices between CFO, CFI (Investing), and CFF (Financing).

Key Points

Non-cash activities are disclosed in footnotes, not the cash flow statement.
US GAAP classifies interest received/paid and dividends received as CFO.
US GAAP classifies dividends paid as CFF.
IFRS allows interest paid to be CFO or CFF.
IFRS allows dividends received to be CFO or CFI.
Bank overdrafts are cash equivalents under IFRS but financing (CFO/CFF) under US GAAP.

Direct vs. Indirect Methods5 min

The text contrasts the Direct and Indirect methods for presenting Cash Flow from Operations. The Direct method lists actual cash inflows and outflows (e.g., Cash collected from customers, Cash paid to suppliers). The Indirect method starts with Net Income and adjusts for non-cash items (like depreciation), non-operating items (gains/losses on asset sales), and changes in working capital. The chapter emphasizes the inverse relationship between asset changes and cash flow (asset increase = cash outflow) and the direct relationship for liabilities (liability increase = cash inflow).

Key Points

Direct method shows gross cash receipts and payments.
Indirect method reconciles Net Income to Cash Flow from Operations.
Depreciation is added back to Net Income in the Indirect method.
Gains on asset sales are subtracted; losses are added back.
Increases in current assets reduce cash; increases in current liabilities increase cash.

Computation and Conversion Techniques5 min

Practical analysis involves computing specific cash flows using Income Statement and Balance Sheet data. For instance, 'Cash received from customers' is derived from Net Sales adjusted for the change in Accounts Receivable. Similarly, 'Cash paid to suppliers' adjusts Cost of Goods Sold (COGS) for changes in Inventory and Accounts Payable. The text also covers converting an indirect cash flow statement to a direct one by adjusting specific income statement line items for the changes in their associated balance sheet accounts.

Key Points

Cash Received = Sales - Increase in Accounts Receivable.
Cash Paid to Suppliers = COGS + Increase in Inventory - Increase in Accounts Payable.
Cash Paid for Interest = Interest Expense - Increase in Interest Payable.
CFO relates to Current Assets and Current Liabilities.
CFI relates to Non-Current Assets.
CFF relates to Non-Current Liabilities and Equity.

Questions

Question 1

How should non-cash investing and financing activities be reported according to the text?

Analyzing Statements of Cash Flows I

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