Financial Statement Analysis
Build an indirect cash flow bridge
What you will learn
Explain why cash from operations differs from earnings.
Simplified CFO = profit + noncash expenses − increase in operating working capital
Choose a starting profit measure and reconcile using the presentation basis. Add back expenses that did not use cash in the period. Remove items whose cash effects belong elsewhere. Then adjust for operating working capital and other relevant reconciling items. Use the same period and check whether acquisitions or FX distort balance changes. A fictional Kerala wholesaler earns ₹12 lakh, records ₹3 lakh depreciation, grows receivables by ₹5 lakh and grows payables by ₹2 lakh. Simplified CFO is ₹12 lakh.
A fictional Kerala wholesaler earns ₹12 lakh, records ₹3 lakh depreciation, grows receivables by ₹5 lakh and grows payables by ₹2 lakh. Simplified CFO is ₹12 lakh.
Choose a starting profit measure and reconcile using the presentation basis. Add back expenses that did not use cash in the period. Remove items whose cash effects belong elsewhere. Then adjust for operating working capital and other relevant reconciling items. Use the same period and check whether acquisitions or FX distort balance changes. A fictional Kerala wholesaler earns ₹12 lakh, records ₹3 lakh depreciation, grows receivables by ₹5 lakh and grows payables by ₹2 lakh. Simplified CFO is ₹12 lakh.
An increase in trade receivables does what to CFO in the simplified bridge?