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Hi jolead199

To my knowledge, the rules for how the indirect method is used to arrive at Cash Flow From Operations (CFFO) have not changed. It begins with Net Income Before income attributable to Non-Controlling Interests is subtracted out. From this, on the Statement of Cash Flows (SCF), in calculating the CFFO, non-cash expenses from the income statement are added back and non-cash income is subtracted. These adjustments along with changes in working capital accounts, will add and subtract from Net Income to arrive at CFFO.

In their book Creative Cash Flow Reporting, Mulford and Comiski in chapter 8 talk about how to use CFFO to detect earnings problems. Earnings, as shown on the income statement, is a 'soft' number as it can be manipulated within GAAP but unlike the SCF, these 'adjustments' can be carried forward for several operating quarters, whereas this is almost impossible to do with cash. So by tracking the ratio of Net Earnings to CFFO, as this ratio increases, this suggests the company may be manipulating earnings....although changes in this ratio occur 'normally' depending on where the company is in its life-cycle.

Yes, all operational expenses, including taxes, come out in arriving at CFFO.

I almost exclusively use the SCF in analyzing a company's ability to sustain and grow its dividend. I don't find the earnings/CFFO ratio very useful, but instead I like to track the trends of several other CF ratios that I've found will show the financial health of a company much better.

BruceM
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