CFF,CFI

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dlkillabee

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I figured out how to calculate CFO, but for some reason I'm having a lot of trouble with CFF and CFI, can someone give me the run down!!
Thanks all
 
CFI includes any capital, business, or other investments. Purchases and sales of PP&E, purchases and sales of marketable securities, and purchases and sales of other businesses would fall here.

CFF measures outside financing related activities. Issuance or repayment of debt, issuance or repurchases of shares of stock, and dividend payments would fall here.

Looking at CFO, CFI and CFF together gives you a nice picture of how the company obtained funds as well as how they used them. Does CFO exceed CFI? If so then the company was able to fund investments with internally generated funds. If CFO does not exceed CFI then the company had to obtain cash for their investments somewhere. Did they do this by issuing additional shares of equity? Additional debt? If they didn't finance growth with outside funds then they had to use existing cash. CFO-CFI-CFF=Change in cash.
 
Thank you so much for getting back to me. Thanks for the overall picture.

How would your calculate CFF and CFI? I know it's the same for direct and Indirect, but I'm also having trouble picking out the numbers for the income and balance. Once I pick them out, how do I know what to add/subtract?
 
First, you need to figure out which items from balance sheet and income statement to include in CFI and CFF. Second, think in terms of cash inflow, cash outflow. If it's a cash inflow add, if outflow- subtract.

Good luck!
 
CFI - A lot of times it is difficult to calculate this yourself. However, if this does show up on the test then it won't be too complicated. To calculate net purchases of PP&E, look at the change in gross PP&E year-over-year. If it decreased then they sold PP&E and thus have a cash inflow. For an increase, the opposite is true. You can do the same with marketable securities or long-term investments. If the company completed any acquisitions during the year then you wouldn't be able to calculate CFI yourself. You would need the company to break out PP&E purchases from the assets purchased in the acquisition. Any investments in joint ventures would also belong to CFI but I won't go into calculating the cash flow because I don't think you need to know if for LI.

CFF- Look at the difference in total interest-bearing debt year-over-year. By total debt I mean long-term debt, current maturities of long-term debt as well as any short-term notes payable. Subordinated debt would also be included. If debt increased then the company obviously issued debt, which is a cash inflow. If debt decreased then the reverse is true, the company retired some debt, which is a cash outflow. For cash flows from stock repurchases or issuances, look at the common stock account as well as paid in capital. If the number of shares issued and outstanding changes then the company either retired or issued shares. You will need to add up both the par value of the common stock and the paid in capital amount and take the difference year-over-year. Decreases are a cash outflow and increases are a cash inflow. NOTE: Sometimes companies will charge stock repurchases to retained earnings. I'm pretty sure CFAI wouldn't throw something like this at you on the test so I wouldn't worry about that. To calculate the dividend payment look at beginning retained earnings, net income and ending retained earnings. If there are no dividend payments then Ending RE=Beg RE + NI. If there are dividend payments then Ending RE = Beg RE + NI - Dividends. Alternatively, you can calculate dividend payments as Dividends = (Beg RE + Net Income) - Ending RE.
 
could u let me know why an increase in div payable is not added back while calc. CFO ( indirect method)
 
nisha_p, your attention should focus on the increase(decrease) in operating assets and liabilities, such as accounts receivable(payable), etc.

Dividends paid are a CFF outflow, rather than CFO.
 
You wouldn't adjust for dividends payable in CFO because dividends do not reduce net income. NI=Sales-COGS-SG&A-Operating Exp-Interest-Taxes. Dividends are paid after net income. But more importantly, dividends are paid with actual cash and are included in cash flow from financing (CFF). If you see that a company declared XX in dividends and dividends payable increased, then you would adjust the amount of dividends declared by the increase in dividends payable.

Accrual accounting doesn't always reflect actual cash transactions. This is why the cash flow statement is so important. When calculating CFO under the indirect method, you are adjusting net income for any accrual transactions. The same goes for CFF when calculating dividends paid. Although the company declared the dividends, if they haven't paid them at the financial statement date then they need to record a transaction to account for this. This transaction would be the increase in dividends payable on the balance sheet.
 
thanks !!.. i was taking current liabilities. Guess need to brush up fundamentals big time...
 
Just make sure that the working capital items are related to an income statement account. For instance, receivables are related to sales. When a company sells something on credit they record the sale as revenue and then correspondingly record a receivable on the balance sheet. The increase in receivables is deducted from sales to derive the cash inflow. Also, inventory and payables are related to COGS. When a good is sold, the cost of the item is transferred from inventory on the balance sheet to COGS on the income statement. That doesn't account for the actual cash transaction though and you need to adjust COGS for changes in the inventory balance. You also need to adjust for changes in payables because the company may have purchased the inventory on credit or they may have retired some existing outstanding payables. Also, a company has to record salaries earned during the period and this is recorded as an operating expense on the income statement; however, if the check hasn't been cash yet then the company must record an increase in accruals on the balance sheet. This increase needs to be added to Net income to derive cash flow (because it was originally subtracted from sales). Thinking like this will also help you derive CFO using the direct method.
 
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