International Financial Statement Analysis Workbook, 3rd Edition

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 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.

SUMMARY OVERVIEW

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