International Financial Statement Analysis, 3rd Edition

CHAPTER 6

UNDERSTANDING CASH FLOW STATEMENTS

Elaine Henry, CFA

Thomas R. Robinson, CFA

Jan Hendrik van Greuning, CFA

Michael A. Broihahn, CFA

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 non-cash investing and financing activities are reported;
• contrast cash flow statements prepared under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (US GAAP);
• distinguish between the direct and indirect methods of presenting cash from operating activities and describe 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.

1. INTRODUCTION

The cash flow statement provides information about a company's cash receipts and cash payments during an accounting period. The cash-based information provided by the cash flow statement ...