cash flow

CFA Level II
#1

i just finished ss5 and i have some questions on cash flows… cost or market method… dividends and interest are considered cfo inflow… initial investment cfi outflow… equity method… dividends and interest are comsidered cfo inflow … initial investment cfi outflow… consolidated— you combine the cash flow statements and deduct intercompanty transactions… proportionate consolidation-- is it the same as consolidation just as a %?? purchase method vs pooling… this is where i get confused… pooling method what is the cash flow impact? purchasing method what is the cash flow impact? thanks for the help in advance

#2

I never got through cash flow without biting. Go ask Mr. Owl.

#3

I’ll give this a shot. My understanding is that cash flow is unaffected by the purchase- and pooling methods. Rather, there is direct impact on the combined firm’s balance sheet and some indirect impact on the income statement. Two examples: 1) Company A acquires Company B and accounts for the transaction using pooling of interests (which BTW isn’t permitted anymore). The balance sheets of both firms are combined at book values. Historical financials are restated as if the companies had been merged for a period of time. Nice and simple. 2) Same transaction as above, but this time the purchase method is used. Historical financials are NOT restated. The balance sheet of Company B must be marked-to-market. Let’s assume this results in a higher book value for both Company B’s inventory and PP&E. Subsequent to the closure of this acquisition, both COGS and depreciation expense will be higher than would have been the case under the pooling method. Further, the increased book value of assets and expenses reduces certain profitability- and efficiency ratios, like ROA and ROE, and total asset turnover. I think cash flow is just cash flow: independent of accrual accounting methodologies. Anyway, my knowledge of this subject is confined to what I’ve studied as a CFA candidate, and input from our resident FSA gurus is certainly welcomed.

#4

thanks guys… i gues cash is cash hrder to manipulae it