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

  • Compare 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.
  • Contrast cash flow statements prepared under International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (U.S. GAAP).
  • Distinguish between the direct and indirect methods of presenting cash from operating activities and describe the arguments in favor of each method.
  • Describe how the cash flow statement is linked to the income statement and the balance sheet.
  • Describe 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.
  • Convert cash flows from the indirect to direct method.
  • Analyze and interpret both reported and common-size cash flow statements.
  • Calculate and interpret free cash flow to the firm, free cash flow to equity, and performance and coverage cash flow ratios.


  • Cash flow activities are classified into three categories: operating activities, investing activities, and financing activities. Significant noncash transaction activities (if present) are reported by using a supplemental disclosure note to the cash flow statement.
  • Cash flow ...

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