CFA Level I, Finan­cial Report­ing and Ana­ly­sis, Cash Flow Statement

The­re are two dif­fe­rent ways to cal­cu­la­te the state­ment of cash flows, the direct for­mat and

the indi­rect format. 

Using the direct for­mat, we cal­cu­la­te the cash flow as:

cash flow = inco­ming cash flows — out­go­ing cash flows.

Howe­ver, when using the indi­rect for­mat, we cal­cu­la­te the cash flow this way:

cash flow = net income

+ expen­ses that were not cash outflows

- reve­nues, that were not cash inflows

+ cash inflows, that were not revenues

- cash out­flows that were not expenses

Let us take a look at an exam­p­le to bet­ter under­stand the two con­cepts lea­ding to the same result. 

Exam­p­le:

Com­pa­ny XY had sales $8,000, but only 30% of them were paid in the same peri­od. The sala­ries paid amoun­ted to $2,000, the inte­rest paid was $1,000. Loan was gran­ted by banks at $ 3,000, the prin­ci­pal pay­ment on a dif­fe­rent loan was $800. Depre­cia­ti­on and amor­tiza­ti­on was $700, the purcha­se of equip­ment amoun­ted to $1,200.

Cal­cu­la­te the cash flow, using the direct for­mat as well as the indi­rect format. 

Solu­ti­on:

First, we need to com­pu­te net inco­me. This is this done by 

net inco­me =  reve­nue — expenses 

= 8,000 — (2,000 + 1,000 + 700) 

= 8,000 — 3,700

= $4,300.

Then, using the indi­rect for­mat, we shall com­pu­te as follows:

net inco­me 4,300

plus expen­ses that were not cash out­flows +700

minus reve­nues, that were not cash inflows -5,600

plus cash inflows, that were not reve­nues +3,000

minus cash out­flows that were not expen­ses -2,000

= cash flow. = +400.

Using the direct for­mat, we com­pu­te the cash flow as follows:

cash flow =  cash inflow —  cash outflow 

= 0.3*8,000 + 3,000 — (2,000 + 1,000 + 800 + 1,200)

= 5,400 — 5,000

= +400.

As pro­mi­sed, the two for­mats lead to the same result.

The most important points of Finan­cial Report­ing and Ana­ly­sis, and Long-Lived Assets in this post can be sum­ma­ri­sed in this Mind­Map:

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