Analyzing Statements of Cash Flows I

How the cash flow statement ties the income statement to two balance sheets, how operating cash flow is built with the direct and the indirect method, how investing and financing cash flows are recovered from balance sheet changes, how to convert an indirect statement to a direct one, and where IFRS and US GAAP classify cash flows differently.

1. 1. How the cash flow statement links to the other statementsThe cash flow statement explains, activity by activity, how cash moved from one balance sheet to the next, while the income statement explains the same period on an accrual basis; the gaps between the two show up as changes in working capital accounts.Free12 min
2. 2. Operating cash flow: the direct methodThe direct method lists operating cash by source and use, and each line is found by taking an income statement amount and adjusting it for the change in the related working capital account.Video · 6 min14 min
3. 3. Operating cash flow: the indirect methodThe indirect method starts from net income and undoes everything that is not operating cash: it adds back non-cash expenses, removes non-operating gains and losses, and adjusts for changes in working capital.Video · 6 min14 min
4. 4. Investing and financing cash flows from balance sheet changesInvesting and financing cash flows are reported gross and directly under both methods, and when they are not given you can rebuild them from the changes in long-term asset, debt and equity accounts.14 min
5. 5. Converting the indirect method to the direct methodMost companies publish only an indirect cash flow statement, but in three steps an analyst can turn it into an approximate direct-method statement that shows cash collected and cash paid line by line.Video · 6 min12 min
6. 6. Cash flow statements under IFRS and US GAAPUS GAAP fixes where interest, dividends and taxes go, while IFRS lets companies choose between two sections for interest and dividends, so the same company can report different CFO under the two frameworks.12 min