chapter 3.txt

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Author:
cramphal
ID:
68458
Filename:
chapter 3.txt
Updated:
2011-02-23 16:13:12
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Analysis Cash Flows
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Description:
Financial Statement Analysis
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  1. Define cash flows from operations (CFO)
    • Relating to most income statement activities
    • essential to the long-term viability of the company
    • Excludes gains and losses--result from financing and investing activities
  2. What activities are included under GAAP as useful for valuing equity but are excluded as useful for valuing the firm?
    • Cash received from interest--CFI
    • Cash received from dividends--CFI
    • Cash paid for interest--CFF
  3. Define cash flows from investing activities (CFI)
    • Arise from the purchase and sale of noncurrent assets
    • Currents assets are sometimes included if they are non-operating accounts (Example: short-term investments in securities)
  4. Define cash flows from financing activities (CFF)
    Arising from the issuance and retirement of interest-bearing debt, issuance and buybacks of stock, and dividend payments
  5. What is the free cash flow formula and modified free cash flow formula?
    FCF = CFO - Net Capital Expenditures (CFI) <--useful for valuation of equity

    • FCF' = CFO' - CFI' <-- useful for valuing the firm
    • calculate CFI' by adding back cash collected for interest and subtracting cash paid for interest.
    • Adjust CFO' accordingly as well.
  6. What is the indirect method?
    • More common method
    • Starts with net income and adjusts for accruals and deferrals (example: add back depreciation expense)
  7. What is the direct method?
    • FASB recommended format
    • More informative
    • each line item on the income statement is converted to a cash basis

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