Financial Accounting (Fach) / Statement of Cash Flows (Lektion)

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  • Indirect Method Model Formula Alternative way of thinking of the indirect method as a "correction" to net income, we can derive the Statement of CF by rearranging the A=L+E equation. A = L = E ΔA                                   =                  ΔL + ΔE ΔCash                                                ΔOp.Liab. + ΔOpAssets                                       ΔNonOpLiab   + ΔNonOpAssets                               +ΔRE + ΔCommonStock                                                                       ΔRE = NetIncome - Dividends          ΔNonOpAssets = P - BVSales - Depreciation  ΔCash  = ΔOp.Liab. + ΔNonOpLiab  + (NetIncome - Dividends) + ΔCommonStock -      ΔOpAssets - (P - BVSales - Depreciation)                   
  • Key IFRS and US GAAP Differences 1. Interest Received, Dividends Received IFRS:         CFO OR CFI US GAAP: CFO 2. Interest Paid, Dividends Paid IFRS:         CFO OR CFF US GAAP: CFO => Classification is more flexible under IFRS. We have to be aware of this, even when comparing statements that both report under IFRS. 
  • Free Cash Flows In practice, a common valuation technique is to discount some versions of expected future cash flows by an appropriate cost of capital or WACC (Weighted Average Cost of Capital).  Investors and analysts commonly use FCF within their discounted Cash flow valuations.  FCFF (free cash flow to the firm) captures the cash generated by a company, after paying taxes and funding working capital necessary to maintain current operations. FCFF represents cash available to all providers of capital (debt and equity)
  • FCFF Formula Basic FCF Formula: FCF = CFO - CAPEX Full Free Cash Flow To The Firm Formula EBIT - Taxes (at marginal tax rate) + Depreciation - CAPEX - Increase in WC = Free Cash Flow to the Firm
  • Indirect Method Adjustments Adjustment for Gains and Losses from Selling PPE: Cash received is classified as investing cash inflow. Gains must be substracted from net income to avioad double counting the gain.  Dr Cash (A)                   100000 Cr Equipment (A)             90000 Cr Gain on sale (G)         10000 Adjustment for Depreciation Noncash Items (Expense) that did not affect Cash. Cash Outflow in CFI when we bought equipment No cash outflow for the depreciation expense counted in NI Dr Depreciation (E)               121.3 Cr Accumulated Dpr (XA)     121.3 Dr PPE (A)                              71.3        Cr Cash (A)                             71.3 Adjustment for changes in Current Assets and Liabilities Adjust for all changes in operating balance sheet accounts other than cash itself.
  • Cash collected from customers Revenues + Increase in Unearned Revenue - *Increase in A/R(-Write Offs) Increase in A/R = BBA/R - Write offs - EBA/R
  • Cash paid to supplies COGS  + Increase in Inventory - Increase in A/P
  • Direct Method: Cash flows from operating activities Cash receipts from customers +Cash generated from operations - Cash paid to suppliers - Cash paid to employees - Interest paid - Income taxes paidNet cash from operating activities 

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