International Financial Statement Analysis

CHAPTER 6

UNDERSTANDING THE CASH FLOW STATEMENT

Thomas R. Robinson, CFA CFA Institute Charlottesville, Virginia

 

Hennie van Greuning, CFA World Bank Washington, DC

 

Elaine Henry, CFA University of Miami Miami, Florida

 

Michael A. Broihahn, CFA Barry University Miami, Florida

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

• Compare and contrast cash flows from operating, investing, and financing activities and classify cash flow items as relating to one of those three categories given a description of the items.

• Describe how noncash investing and financing activities are reported.

• Compare and contrast the key differences in cash flow statements prepared under international financial reporting standards (IFRS) and U.S. generally accepted accounting principles (U.S. GAAP).

• Explain the difference between the direct and indirect method of presenting cash from operating activities and the arguments in favor of each method.

• Describe how the cash flow statement is linked to the income statement and the balance sheet.

• Explain the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data.

• Analyze and interpret a cash flow statement using both total currency amounts and common-size cash flow statements.

• Explain and compute free cash flow to the firm, free cash flow to equity, and other cash flow ratios.

1. INTRODUCTION

The cash flow statement ...