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Financial Statement AnalysisModule 4 of 9

Analyzing Statements of Cash Flows I

6

Concepts

3

Formulas

1

Decisions

4

Quiz Questions

Key Concepts

6 concepts covered in this module.

Operating Activities (CFO)

Cash from core business operations. Start from net income (indirect) or cash receipts (direct). THE most important section.

Investing Activities (CFI)

Purchases/sales of long-term assets, investments. Negative CFI often signals growth investment.

Financing Activities (CFF)

Debt issuance/repayment, equity issuance/buyback, dividends. Shows how the company funds itself.

Direct vs Indirect Method

Direct: shows actual cash receipts/payments. Indirect: starts with NI, adjusts for non-cash items and WC changes. Same CFO result.

Non-Cash Adjustments (Indirect)

Add back: depreciation, amortization, losses. Subtract: gains. Adjust for WC changes (increase in assets = subtract, increase in liabilities = add).

IFRS vs GAAP Classification

Interest paid: CFO (GAAP) or CFO/CFF (IFRS). Interest received: CFO (GAAP) or CFO/CFI (IFRS). Dividends paid: CFF (GAAP) or CFO/CFF (IFRS).

Formulas

3 essential formulas for this module.

CFO (Indirect Method)

CFO = NI + Non-cash charges + ΔWC

Where: Add depreciation, subtract gains, adjust for changes in current assets/liabilities

WC Adjustment Rule

ΔCurrent Asset ↑ = Subtract from NI; ΔCurrent Liability ↑ = Add to NI

Where: Increase in AR means cash not yet collected; increase in AP means cash not yet paid

Total Cash Change

ΔCash = CFO + CFI + CFF

Where: Must reconcile to change in cash balance

Decision Frameworks

1 decision frameworks to guide your analysis.

Direct vs Indirect method?

  • Direct: better for understanding actual cash flows (preferred by IASB)
  • Indirect: more commonly used, easier to prepare, shows link to NI

Mind Map

Visual overview of how concepts connect in this module.

Cash Flow Statement
CFO
Core operations
Direct: actual cash flows
Indirect: start from NI
WC adjustments
CFI
Buy/sell PP&E
Buy/sell investments
Negative = growth spending
CFF
Debt issuance/repayment
Equity issuance/buyback
Dividends paid
IFRS vs GAAP
Interest: CFO vs choice
Dividends paid: CFF vs choice
Tax: CFO vs allocated

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Analyzing Statements of Cash Flows II