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

In a common-size cash flow statement, an analyst who expresses each line item as a percentage of net revenue is most likely applying which approach?

The approach is vertical analysis with revenue as the base. Each cash flow line is divided by revenue for the same period, so items become comparable across firms and years. Horizontal analysis instead measures change in a line item over time, and regression is unrelated to common-size statements.

  1. AVertical analysis using revenue as the baseCorrect
  2. BHorizontal analysis using prior-year cash flows
  3. CRegression analysis using revenue as the dependent variable

Explanation

Expressing each cash flow line as a percentage of revenue in the same period is vertical (common-size) analysis. Horizontal analysis compares the same item across periods, which is not what is described. Regression is not involved in common-size statements.

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