Hi, so far in the cash flow statement series we have covered the basics of cash flow statements, the different formats in which the cash flow statements are prepared and detailed description of their preparation. Now in the final two installments of the cash flow statement series I’m going to cover the analysis of the common size cash flow statement and the various cash flow ratios.
Common size cash flow statement like the common size income statement and common size balance sheet already covered before, is a standardized version of the cash flow statement. Read along to find out how you read and analyze one.
Common size cash flow statement: Introduction
Common size cash flow statement is a standardized format of the cash flow statement which makes comparison across time periods and across peers more meaningful.
Common size cash flow statement can be built by stating each item in a cash flow statement as a percentage of revenue. Alternatively, each cash inflow can be stated as a percentage of total cash inflows and each cash outflow as a percentage of total cash outflows.
Revenue based common size cash flow statement is useful in forecasting future cash flows once future revenue is forecast.
Common size cash flow statement example
|Common size cash flow statement example|
|Operating cash flow||12.60%||14.30%|
|Purchase of Plant & machinery||-10.30%||-10.00%|
|cash dividends received||1.50%||1.50%|
|Investing cash flow||-8.80%||-8.50%|
|Purchase of bonds||-1.55%||-1.50%|
|cash dividends paid||-2.00%||-2.00%|
|Financing cash flow||-3.55%||-3.50%|
|Total cash flow||0.25%||2.30%|
Analysis of common size cash flow statement example
From the above common size cash flow statement example, we can see that the total cash flow has decreased from 2015 to 2016. The contributing factors are the operating, investing and financing cash flows. So what has caused these cash flows to change over the years?
As you can see from the example, inventory accumulation has gone up from 2015 to 2016, which has taken out a good part of the operating cash flow. Also accounts receivable has gone up by 0.10%. Increase in accounts receivable is indicative of increase of sales on credit and that has further reduced the operating cash flow in 2016.
Increase in purchase of plant and machinery has caused the investing cash outflow to increase.
Similarly, increased purchase of bonds has taken the financing cash flow further into the negative.
So you see, standardizing the various items on the cash flow statement to a common denominator (revenue) makes comparison of the cash flow statements across years and peers so easy and legible.
That’s all in this post…in the next post we will cover cash flow ratios….see you again then…
For solved examples please refer to the CFA Institute books or CFA study notes. The problems can be easily solved using the CFA institute approved financial calculators. Please refer to the CFA exam policy and CFA calculator guide.
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