CFA Level I · CFA Level I Exam

Analyzing Statements of Cash Flows II: formula sheet

Full chapter guide

Key formulas

CFO, indirect method: CFO = NI + non-cash charges − non-operating gains (+ non-operating losses) − increase in operating assets + increase in operating liabilities; Under IFRS, interest and dividends received can be in CFO or CFI, and interest and dividends paid can be in CFO or CFF. Under US GAAP, interest paid and received and dividends received are in CFO, and dividends paid are in CFF.
Retained earnings roll-forward: Ending RE = Beginning RE + Net income − Dividends declared; Use it to back out dividends when only RE and net income are given.
Cash collected from customers: Cash from customers = Revenue − increase in accounts receivable (or + decrease); Assumes no write-offs or other adjustments.
Cash paid to suppliers: Cash paid = COGS + increase in inventory − increase in accounts payable; Reverse the signs for a decrease.
PP&E roll-forward: Ending net PP&E = Beginning net PP&E + Capex − Depreciation − Carrying amount of assets sold; Solve for capex or proceeds. Proceeds = carrying amount + gain (or − loss).
Net change in cash: Change in cash = CFO + CFI + CFF (+ FX effect); Must equal ending cash minus beginning cash.
Revenue-based common-size: Line item % = Cash flow line item ÷ Net revenue × 100; Apply to CFO, CFI, CFF and each component. Keep the sign of each item.
Total cash inflow-based common-size (inflows): Inflow % = Cash inflow item ÷ Total cash inflows × 100; Total inflows = sum of all positive cash flow items. Inflow percentages sum to 100%.
Total cash outflow-based common-size (outflows): Outflow % = Cash outflow item ÷ Total cash outflows × 100; Total outflows = sum of absolute values of all negative items. Outflow percentages sum to 100%.
FCFF from net income: FCFF = NI + NCC + Int(1 − t) − FCInv − WCInv; NCC is non-cash charges such as depreciation and amortization. FCInv is fixed capital investment (capex net of asset sales). WCInv is the increase in working capital.
FCFF from CFO: FCFF = CFO + Int(1 − t) − FCInv; Use when interest paid is in CFO, as US GAAP requires and IFRS allows. CFO already includes the working capital change. If interest paid is in financing under IFRS, CFO is before interest, but the taxes paid in CFO still reflect the interest deduction. You must remove that tax saving, so FCFF = CFO − Int × t − FCInv.
FCFF from EBIT: FCFF = EBIT(1 − t) + Dep − FCInv − WCInv; Dep is depreciation and amortization. Tax is applied to EBIT, so no interest adjustment is needed.
FCFF from EBITDA: FCFF = EBITDA(1 − t) + Dep × t − FCInv − WCInv; Depreciation is added back only for its tax shield, Dep × t.
FCFE from CFO: FCFE = CFO − FCInv + Net borrowing; Net borrowing = debt issued − debt repaid. This assumes interest paid is in CFO, so CFO is already after interest. If interest paid is in CFF under IFRS, CFO is before interest, so also subtract after-tax interest: FCFE = CFO − Int(1 − t) − FCInv + Net borrowing.
FCFE from FCFF: FCFE = FCFF − Int(1 − t) + Net borrowing; Subtract after-tax interest because lenders are paid before shareholders.
Cash flow to revenue: CFO ÷ Net revenue; Operating cash generated per unit of sales.
Cash return on assets: CFO ÷ Average total assets; Use the average of opening and closing total assets.
Cash return on equity: CFO ÷ Average shareholders' equity; Use the average of opening and closing equity.
Cash to income: CFO ÷ Operating income; Shows how much operating income is backed by cash.
Cash flow per share: (CFO − Preferred dividends) ÷ Number of common shares outstanding; Preferred dividends are removed because they rank ahead of common shareholders.
Debt coverage: CFO ÷ Total debt; Higher means the firm can repay its debt from operations sooner.
Interest coverage: (CFO + Interest paid + Taxes paid) ÷ Interest paid; Adds back interest and taxes so CFO is measured before them. Check whether interest is already in CFO or in financing under the reporting standard.
Reinvestment: CFO ÷ Cash paid for long-term assets; Shows ability to fund capex from operations.
Debt payment: CFO ÷ Cash paid for long-term debt repayment; Ability to meet scheduled debt repayments from operations.
Dividend payment: CFO ÷ Dividends paid; Ability to pay dividends from operations.
Investing and financing: CFO ÷ Cash outflows from investing and financing activities; Ability to fund all investing and financing outflows internally.

Quick revision

FCFF = CFO + interest paid × (1 − t) − FCInv, where interest is added back only if it was deducted in CFO (US GAAP, or IFRS if classified as operating). If IFRS interest paid is classified as financing, CFO is already before interest and FCFF = CFO − FCInv.
FCFE = CFO − FCInv + net borrowing, with CFO after interest paid (US GAAP, or IFRS if interest is classified as operating). If IFRS interest paid is classified as financing, CFO is before interest, so FCFE = CFO − interest paid × (1 − t) − FCInv + net borrowing.
FCFE = FCFF − interest × (1 − t) + net borrowing, which holds for FCFF defined as before-interest cash flow to all capital providers.
FCFF from net income = NI + non-cash charges + interest × (1 − t) − FC investment − WC investment.
FCFF from EBIT = EBIT × (1 − t) + depreciation − capex − increase in working capital.
FCFF from EBITDA = EBITDA × (1 − t) + depreciation × t − capex − increase in working capital.
Common-size cash flow can be shown as a percentage of revenue or of total cash inflows and outflows.
Cash flow to revenue = CFO ÷ net revenue; cash return on assets = CFO ÷ average total assets.
Debt coverage = CFO ÷ total debt; interest coverage on a cash basis = (CFO + interest paid + taxes paid) ÷ interest paid, where interest paid is added back only if it was deducted in CFO. If IFRS interest paid is classified as financing, the numerator is CFO + taxes paid.
Reinvestment ratio = CFO ÷ cash paid for long-term assets; a higher figure means more internal funding.
Strong operating cash flow that is sustainable is a better source than asset sales or new borrowing.
Under IFRS, interest and dividends received can be operating or investing, and interest and dividends paid can be operating or financing.

Common mistakes

Adding an increase in receivables or inventory to net income. Fix: An increase in an operating asset ties up cash, so subtract it. An increase in an operating liability adds cash.
Leaving a gain on sale of equipment inside CFO. Fix: Subtract the gain in the CFO reconciliation. The full sale proceeds appear in CFI.
Using revenue as the base when the question asks for total cash inflows Fix: Underline the base in the stem before calculating.
Dividing outflows by total inflows Fix: In the total cash flow method, inflows use total inflows and outflows use total outflows.
Adding back full interest instead of after-tax interest Fix: Always use Int(1 − t). Interest of 40 at a 30% tax rate adds back 28.
Adding interest back to CFO when going to FCFE Fix: FCFE is after interest. When interest paid is in CFO, CFO is already after interest, so use CFO − FCInv + Net borrowing. If interest paid is in CFF under IFRS, CFO is before interest, so also subtract Int(1 − t).
Using ending assets or equity instead of the average. Fix: Add opening and closing balances and divide by 2 for cash return on assets and equity, unless told otherwise.
Forgetting to add back interest and taxes in interest coverage. Fix: Use (CFO + interest paid + taxes paid) ÷ interest paid. Think of it as cash flow before interest and taxes.

Exam tips

Practise the sign rule until it is automatic: asset up, cash down; liability up, cash up.
Questions often ask which pattern signals poor quality. Persistent CFO below net income and heavy reliance on financing are the usual answers.
Read the standard: if no one says US GAAP, assume IFRS and remember its classification choices.
With three options, check the sign first. It often eliminates one option immediately.
Do not judge from a single year. Prefer answers that talk about trends and sustainability.
Read the base first. Questions often differ only in the base used.
Remember that under the total cash flow method inflow percentages sum to 100% and outflow percentages sum to 100%.
Expect interpretation questions: what a rising or falling share says about funding or cash generation.