Different Operating Cash Flow measures - Vol5 p147-148

Looks like the CFA has changed one of the definitions of cash flow from operations. I’m sure you’ve all seen the following equations:

FCFF = NI + NCC - Working Capital Investment + Interest(1-tax) - Fixed Capital Investment

CFO = NI+NCC - Working Capital Investment

FCFF = CFO + Interest(1-tax) - Fixed Capital Investment

In vol 5 p148 of the material, the CFA guys provide the following definitions. Doesn’t it look like they have Operating Cash Flow and Free Operating Cash Flow mixed up? In all honesty, I don’t have a firm grasp of how the following measures relate to one another (Operating Cash Flow, Free Operating Cash Flow, Discretionary Cash Flow). Any comments?

Funds from operations Decrease (increase) in noncash current assets Increase (decrease) in nondebt current liabilities Operating cash flow Decrease by capital expenditures Free operating cash flow Decrease by cash dividends Discretionary cash flow Decrease by acquisitions Increase by asset disposals Net other sources (uses) of cash Prefinancing cash flow

Looks like I found part of my answer. From vol 5 p145-146:

“The funds from operations includes net income plus the following: depreciation, amortization, deferred income taxes, and other noncash items. The definition of free operating cash flows varies by rating agency. In the next section we describe one variant of free operating cash flow.” (Institute 146) Institute, CFA. Level II 2012 Volume 5 Alternative Investments and Fixed Income, 6th Edition. Pearson Learning Solutions. .


Funds from Operations = NI + NCC Operating Cash Flow = Funds from Operations - WC Inv Free OCF = Operating Cash Flow - FCInv

Then they go into the definition of Cash Flows that I provided in the initial posting. The way I see it, the cash flow measures above supplement the FCFF and FCFE measures we all know by now although they do have their kinks. Would anyone comment on a set of definitions for cash flows that we should commit to memory? As the reading says, the definition of operating cash flow varies by rating agency and so I don’t really care to learn anything outside of what the CFA requires.


From what I remember, there were different definitions of Cash Flow depending on whether you were in FI or Equity and we need to know them both. I still haven’t hammered out a good way to remember the definitions, but they did make a little sense when you think about analyzing a company as to their ability to meet interest coverage or if you were analyzing their ability to generate cash flow to equity holders.