CFA Level 1 Book page 110-122

4313 words 18 pages
The following is a review of the Financial Reporting and Analysis principles designed to address the learning outcome statements set forth by CFA Institute. This topic is also covered in:

Study Session 8


This topic review covers the third important required financial statement: the statement of cash flows. Since the income statement is based on the accrual method, net income may not represent cash generated from operations. A company may be generating positive and growing net income but may be headed for insolvency because insufficient cash is being generated from operating activities. Constructing a statement of cash flows, by either the direct or indirect method, is therefore
…show more content…

Another example of a noncash transaction is an exchange of debt for equity. Such an exchange results in a reduction of debt and an increase in equity. However, since no cash is involved in the transaction, it is not reported as a financing activity in the cash flow statement. Noncash transactions must be disclosed in either a footnote or supplemental schedule to the cash flow statement. Analysts should be aware of the firm's noncash transactions, incorporate them into analysis of past and current performance, and include their effects in estimating future cash flows.
LOS 27.c: Contrast cash flow statements prepared under International
Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (U.S. GAAP).
C A ® Program Curriculum, Volume 3, page 255

Recall from Figure 1 that under U.S. GAAP, dividends paid to the firm's shareholders are reported as financing activities while interest paid is reported in operating activities.
Interest received and dividends received from investments are also reported as operating activities. International Financial Reporting Standards (IFRS) allow more flexibility in the classification of cash flows. Under IFRS, interest and dividends received may be classified as either operating or investing activities. Dividends paid to the company's shareholders and interest paid on the company's debt may be classified as either operating or financing activities.