International Financial Statement Analysis, 2nd Edition

CHAPTER 6

UNDERSTANDING CASH FLOW STATEMENTS

Elaine Henry, CFA

Coral Gables, FL, U.S.A.

Thomas R. Robinson, CFA

Charlottesville VA, U.S.A.

Jan Hendrik van Greuning, CFA

Reston VA, U.S.A.

Michael A. Broihahn, CFA

Pembroke Pines FL, U.S.A.

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.

1. INTRODUCTION

The cash flow statement provides information about a company’s cash receipts and ...