chapter 3.txt

• Relating to most income statement activities
• essential to the long-term viability of the company
• Excludes gains and losses--result from financing and investing activities

• Cash received from interest--CFI
• Cash received from dividends--CFI
• Cash paid for interest--CFF

• Arise from the purchase and sale of noncurrent assets
• Currents assets are sometimes included if they are non-operating accounts (Example: short-term investments in securities)

Arising from the issuance and retirement of interest-bearing debt, issuance and buybacks of stock, and dividend payments

FCF = CFO - Net Capital Expenditures (CFI) <--useful for valuation of equity

• FCF' = CFO' - CFI' <-- useful for valuing the firm
• calculate CFI' by adding back cash collected for interest and subtracting cash paid for interest.
• Adjust CFO' accordingly as well.

• More common method
• Starts with net income and adjusts for accruals and deferrals (example: add back depreciation expense)

• FASB recommended format
• More informative
• each line item on the income statement is converted to a cash basis