# Study Session 7: Financial Reporting and Analysis: Income Statements, Balance Sheets and Cash Flow Statements

## FCF vs. FCFE vs. FCFF

Hi,

the difference between free cash flow (FCF) and free cash flow to equity (FCFE) is not quite clear to me. The formula for calculating FCF is: CF from operating activities - CF from investing activities. Within the calculation, the interest payments to the lenders are already included in the income statement and thus in the net income for the year. The free cash flow is therefore available to the equity investors and can be used in the next period, for example, to pay out dividends, repay debts or for investments. Am I getting it right so far?

## FCFF Formula

I am trying to understand below:

FCFF = NI + NCC + [Int * (1 - t)] + FCInv - WCInv

but come across one thing which I do not really understand. What does [Int * (1 - t)] mean in this context? I understand that it’s interest expense but why multiply it with the non-tax rates?

## Diluted EPS

Ajax Company’s capital structure was as follows:

12.31.04                  12.31.03

Shares outstanding:

Common                               200,000                  200,000

Convertible preferred              5,000                    5,000

6% Convertible Bonds           \$500,000               \$500,000

## Why is diluted EPS equal to basic EPS when diluted EPS is more than basic EPS?

What is the explanation behind the concept where if diluted EPS is more than basic EPS, the diluted EPS will be equal to basic EPS?

## Cost of Net Debt Confusion

Noticing on the Group Danone Consolidated Income Statement (CFA Vol. 3 p.95, PDF p.111) that cost of net debt doesn’t factor into net income. Am I missing something here?

## Are income taxes an example of expenses classified by nature or by function in the Income Statement?

There is a practice question in Kaplan Schweser t

## Free Cash Flow to the Firm FCFF

Why only Fixed Capital investment is deducted from CFO to arrive at FCFF? Why CFI is not deducted? CFI also includes cash flows and will have an impact on how much Free cash is available to the firm?

## R and D treatement IFRS v GAAP

My understanding is:

IFRS, research is expensed as incurred, development can be capitalized once technological feasibility has been established.

Gaap, research and development is expensed as incurred.

Do I have it down?

## Help! Can someone explain why the financial statement notes state a different number from the cash flow statement

I’ve been studying Lowes 2005 financial statements for several weeks, one of the issues that I can’t understand is:

1. Note 7 states: after discounts and expenses that \$987 million was received from the issuance of new debt.

2. The statement of cash flows states that \$1013 million was received.

## depreciation

1- ” If the asset is expected to have no residual value, the DB method will never fully depreciate it, so the DB method is
typically changed to straight-line at some point in the asset’s life”

this sentence is quoted form schewezer, can someone explain it by a numerical example?

2- is there any difference between Accelerated depreciation and DDM?

if yes provide an example plz.