6.

7 Balance Sheet Basics

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6.8 Balance Sheet Components - Assets

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6.10 Balance Sheet Components - Marketable & Nonmarketable

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6.11 Shareholders' (Stockholders') Equity Basics
6.12 Components of Stockholders' Equity
6.13 Accounting for Dividends

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6.14 Accounting for Equities

6.15 Revenue Recognition
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6.16 Revenue Recognition Methods and Implications

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6.18 Revenue Recognition Effects on Cash Flows and Financial
Ratios
Chapter 1 - 5

Chapter 6 - 6.19
10 The Cash Flow Statement
Chapter 11 - 15

Chapter 16 - 17

6. Financial Statements

6.20 Cash Flow Statement Basics

7. Financial Ratios

6.21 Cash Flow Computations - Indirect Method

8. Assets

6.22 Cash Flow Computations - Direct Method

9. Liabilities

6.23 Free Cash Flow

10. Red Flags

6.24 Management Discussion and Analysis & Financial Statement

Footnotes
6.25 The Auditor and Audit Opinion

6.26 Financial Reporting Objectives and Enforcement

Financial Statements
- Cash Flow Statement
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Financial Statements - Cash Flow Statement

Basics
Statement of Cash Flow
The statement of cash flow reports the impact of a firm's operating, investing and financial
activities on cash flows over an accounting period. The cash flow statement is designed to
convert the accrual basis of accounting used in the income statement and balance sheet back
to a cash basis.
The cash flow statement will reveal the following to analysts:
1.
2.
3.
4.
5.

How the company obtains and spends cash

Why there may be differences between net income and cash flows
If the company generates enough cash from operation to sustain the business
If the company generates enough cash to pay off existing debts as they mature
If the company has enough cash to take advantage of new investment opportunities

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Segregation of Cash Flows

The statement of cash flows is segregated into three sections:
1. Operating activities
2. Investing activities
3. Financing activities

1. Cash Flow from Operating Activities (CFO)

CFO is cash flow that arises from normal operations such as revenues and cash operating
expenses net of taxes.

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This includes:
Cash inflow (+)
1. Revenue from sale of goods and services
2. Interest (from debt instruments of other entities)
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3. Dividends (from equities of other entities)

Cash outflow (-)
1. Payments to suppliers
2. Payments to employees
3. Payments to government
4. Payments to lenders
5. Payments for other expenses

2. Cash Flow from Investing Activities (CFI)

CFI is cash flow that arises from investment activities such as the acquisition or disposition of
current and fixed assets.
This includes:
Cash inflow (+)
1. Sale of property, plant and equipment
2. Sale of debt or equity securities (other entities)
3. Collection of principal on loans to other entities
Cash outflow (-)
1. Purchase of property, plant and equipment
2. Purchase of debt or equity securities (other entities)
3. Lending to other entities

3. Cash flow from financing activities (CFF)

CFF is cash flow that arises from raising (or decreasing) cash through the issuance (or
retraction) of additional shares, short-term or long-term debt for the company's operations.
This includes:
Cash inflow (+)
1. Sale of equity securities
2. Issuance of debt securities
Cash outflow (-)
1. Dividends to shareholders
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1. Dividends to shareholders
2. Redemption of long-term debt
3. Redemption of capital stock

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Reporting Noncash Investing and Financing Transactions

Information for the preparation of the statement of cash flows is derived from three sources:

1. Comparative balance sheets

2. Current income statements
3. Selected transaction data (footnotes)
Some investing and financing activities do not flow through the statement of cash flow
because they do not require the use of cash.
Examples Include:
Conversion of debt to equity
Conversion of preferred equity to common equity
Acquisition of assets through capital leases
Acquisition of long-term assets by issuing notes payable
Acquisition of non-cash assets (patents, licenses) in exchange for shares or debt
securities
Though these items are typically not included in the statement of cash flow, they can be
found as footnotes to the financial statements.

Next: Cash Flow Computations - Indirect Method

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A financial analyst researches companies and economic conditions to make

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The non-profit sector offers a stable selection of jobs for those who seek
other types of fulfillment from their jobs than just purely financial.

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YOUR PRACTICE

4 Professional Associations Advisors Should Join

These four professional organizations are among the most respected and
well known in the industry.

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Equity Research: Career Path and Qualifications

Find out what equity research analysts do on a day-to-day basis, and learn
more about the typical career progression for these securities professionals.

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What's on the CFA Level II Exam?

The Chartered Financial Analyst Level II exam is the second of three tests
that CFA candidates must pass.

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Learn more about the career options available to financial data analysts, and
determine whether the profession is a good match for you.

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