Friday, July 13, 2012

Cash Flow

A company reports its net income after tax (net profit) on the income statement. That net income is reduced if the company is subtracting large amounts for depreciation/amortization. If a company bought a printing press for $1 million cash a while ago, they might be subtracting $100,000 a year until they've written down the cost to zero, in order to spread the cost over the useful life of the equipment. But those subtractions now are not cash--they are a reality check. Since depreciation/amortization is a non-cash subtraction on the income statement, analysts often add back that subtraction to the net income in order to estimate how much cash the company is generating.
In the 10K, the company shows its balance sheet and income statement, and also a statement of cash flows. There are three ways a company can use or generate cash each year: operations, investing, financing. A company can generate or use up cash operating its business, but also by investing in equipment (or selling it off) or issuing securities (or buying them back). So, if the company's cash position increases, analysts would note perhaps that it's simply due to a recent offer of stock or convertible debentures (financing). If the cash position drops this year, maybe it's only because the company wisely invested cash into better equipment (investing). For extra credit "google" a public company's 10K and read thru the consolidated financial statement and the notes to it. It could REALLY help you on a few test questions. NEED HELP with your exam?


  1. Good stuff. Just one question with regard to the 65/66. I've seen some people post that they have the 63 and are taking the 66. Isn't that redundant, since the 66 is the equivalent of the 63 and 65? Why not just take the 65?

  2. People like shorter tests. The Series 66 is 100 questions vs. 130 on the Series 65. The 66 option is available to those with a Series 7, so if somebody did the old-school route of Series 7-plus-63 and now needs to become an IAR, it's a toss-up between taking the Series 65 or Series 66. The exams are equally hard to pass, so many folks, again, like the shorter test--the series 66. If one likes questions on Economics and Investment Vehicles, he should take the Series 65. If he prefers more questions on regulations/definitions, he should take the Series 66. Either way, he should really study.

  3. there are other posts on this blog, e.g. License Exams, that address the tricky differences and similarities between the 65 and 66. Thanks for your comment.