CHAPTER 6
UNDERSTANDING CASH FLOW STATEMENTS
LEARNING OUTCOMES
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.
SUMMARY OVERVIEW
- 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 ...
