Cash Flow From Operations

Definition - What does Cash Flow From Operations mean?

In the CFA exam, cash flow refers to monetary movement into or out of a business or project. Cash flow represents a critical part of the analysis of a company. It is highly likely that you will need to be able to convert from net income to cash flow from operations.

Always make sure you read the question carefully as to whether you are being asked about cash flow or cash flow from operations.

Testopedia explains Cash Flow From Operations

When going from income to cash, check that:

  • You have added back any depreciation and amortization gains (deduct) or losses (add) on sales of assets, etc.

  • Bad debts are not a cash flow

  • Provisions for bad debts, provisions for deferred tax, etc. are not cash flows. These are accounting adjustments to earnings

  • Increases in current assets are a use of cash (more receivables than last year means more customers not paying you)

  • Increases in current liabilities are a source of cash as you are taking longer to pay your supplier

Cash flows can be categorized differently under U.S. GAAP or IFRS.

Free cash flow to the firm is the cash available to the company’s suppliers of debt and equity capital. It is calculated as:

CFO - Net Investment in Capital Expenditure + Post-Tax Interest Paid

Free cash flow to equity is the cash available to the company’s common stockholders. It is calculated as:

CFO - Net Investment in Capital Expenditure - Net Debt Repayment

Free cash flow is an alternative cash flow measure often used in security valuation.

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This definition was written in the context of CFA

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