NEVER use historical BS and IS for historical CF statement creation. You MUST input directly from actual figures. If you look at most CF statements, i.e. Inventory changes in Working Capital section, you'll see that the CF number rarely matches the change in corresponding periods on the BS. This is ... NEVER use historical BS and IS for historical CF statement creation. You MUST input directly from actual figures. If you look at most CF statements, i.e. Inventory changes in Working Capital section, you'll see that the CF number rarely matches the change in corresponding periods on the BS. This is due to writedowns, charge-offs, reserve allowances, etc that we don't have detail for, but the auditors have figured out. As such, you must portray the actual cash changes, not from calculating yourself historically.

Generally speaking, for transaction models (i.e. M&A, LBO), we don't usually need the historical CF statement because the items on the CF statement are mostly derived from the IS or BS.
i.e. in our Advanced Financial Modeling - Core Model course, we explain how to construct CFO which is largely based on IS (Net Income, Depr, etc) and BS for working capital purposes and deferred taxes.
The other line items in CFO (such as one-time gains, SBC comp etc) aren't driven off the historical CF figures.

For CFI, the biggest items are (i) CapEx which is from mgmt or separate detailed schedule of future costs; and (ii) acquisitions (see our merger classes for proper merger accounting).

However, for purposes of building a tracking model (whether equity research or private equity and budgeting/reporting), we will include historical CF statement for completeness sake; however, historical CF doesn't usually drive future CF figures.

The exception is for CFF and capital structure inputs. For our CFF items such as repurchases and dividends, you'll need a detailed schedule as well that once again, is driven independently as opposed to based on historical CFF. i.e. for dividends, we are about historical dividends per share to drive future dividends, as opposed to historical reported amounts on CFF.

Occasionally, one will need historical CF statement to project future CF statement items, but these are specific line items. i.e. in our advanced modeling class for banks, we need the historical CF statement to drive the future, but that is an exception. Read More

I appreciate the prompt feedback. Understood on the Historical CF and reasons why the historical inputs are more accurate. In the spirit of remaining consistent, if we are making adjustments to the [historical and future] income statement to arrive at normalized income/earnings but then using the ... I appreciate the prompt feedback. Understood on the Historical CF and reasons why the historical inputs are more accurate.

In the spirit of remaining consistent, if we are making adjustments to the [historical and future] income statement to arrive at normalized income/earnings but then using the historical CF statement as is, would that mislead our understanding of the historical performance of the company? Which in turn can alter our projections to what is reasonably expected.


Will be going through the adv excel and M&A courses, so can come back with questions after that. Read More

Please don't forget that cash is cash.
As such, regardless of the one-time adjustments one makes on IS and BS, cash never changes.

Thanks.

So if i wanted to rearrange/reclassify the historical CF statement to better reflect what I would consider CFO for example, as some companies might not classify some line items correctly, you suggest just plugging in the numbers from the CF statement and aggregate accordingly?

Yes, that is the correct approach that we would take and recommend. Much of this logic is explained in our courses. i.e., we take the liberty to recast the Income Statement and Balance Sheet as we see fit. Certain items, such as NCI (Non-Controlling Interest or the old Minority Interest), are below ... Yes, that is the correct approach that we would take and recommend.
Much of this logic is explained in our courses. i.e., we take the liberty to recast the Income Statement and Balance Sheet as we see fit. Certain items, such as NCI (Non-Controlling Interest or the old Minority Interest), are below Net Income or sometimes above Net Income and we tend to standardize how we want to present the numbers. On the B.S., NCI is sometimes a separate line item and sometimes part of equity and sometimes part of liabilities. We always recast however we think about it for that that business. Ditto for the CF Statement. If you'd like to move the company's classification of interest expense/interest income to/from CFO / CFF, or an another item that should be part of CFI but was in CFO, or vice versa, feel free to do so, as long as the final numbers always match. Read More

Hi, yes recasting of financial statements are definitely recommended which would be required for forecasting. Additionally if you are trying to analyze historical balance sheet (say any specific trend or ratio) or you are trying to compare to a industry benchmark ratio, then standardization of finan... Hi, yes recasting of financial statements are definitely recommended which would be required for forecasting. Additionally if you are trying to analyze historical balance sheet (say any specific trend or ratio) or you are trying to compare to a industry benchmark ratio, then standardization of financials especially profit margins, current ratio, working capital cycle, leverage levels is definitely suggested. Read More