Analyzing Statements of Cash Flows I
Refresher reading access
Introduction
The statement of cash flows provides important information about a company’s cash receipts and cash payments during an accounting period, reconciling the cash accounts between balance sheet dates. Although the income statement provides similar measures on an accrual basis, cash flows and their timing are crucial to valuation as payments to investors are made in cash. Investors also use statement of cash flows to evaluate the company’s liquidity, solvency, and financial flexibility. In this module, we discuss the components of the cash flow statement and its links to the other financial statements.
Learning Outcomes
The candidate should be able to:
- describe how the cash flow statement is linked to the income statement and the balance sheet
- describe the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data
- demonstrate the conversion of cash flows from the indirect to direct method
- contrast cash flow statements prepared under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (US GAAP)
1 PL Credit
If you are a CFA Institute member don’t forget to record Professional Learning (PL) credit from reading this article.