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CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows II

An analyst prepares a common-size cash flow statement for a company using total cash inflows and total cash outflows as the bases for each line item. Compared with using net revenue as the base, this approach is most likely to:

This approach most likely shows the relative importance of each source and use of cash. Each inflow is expressed as a share of total inflows and each outflow as a share of total outflows, revealing where cash originates and where it goes, unlike a revenue base.

  1. Ashow the relative importance of each source and use of cashCorrect
  2. Beliminate differences caused by each firm's depreciation method
  3. Cmeasure how efficiently the firm converts revenue into earnings

Explanation

Using total inflows and outflows as the base shows the proportion of cash coming from each source and going to each use. It does not remove differences in depreciation method, and it does not measure revenue conversion, which is the purpose of a revenue base.

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