RSS feedLast but not least, the statement of cash flows. Here again is another link to an example cash flow statement. I would like to make mention that the company that I am using in all these examples is not an endorsement for it. It was completely random that I chose it and I have no idea whether or not it would make a good investment. Maybe, I will do a quick case study after this series to see if it actually would make a good investment. But, before all that can be done, it is necessary to get a grip on the last of the three sheets.
The cash flow statement complements the balance sheet and the income statement and it is another one of the mandatory financial statements that must be filed with a company’s annual and quarterly reports. The balance sheet gives and idea of a company’s general financial situation - what it owns, what it owes, and how much is left over for share holders. The income statement gives the reader an overall view of how the company is performing financially. The cash flow statement gives a view of how the company is performing in the short term. Unlike the income statement which records performance based on future incoming and outgoing cash on credit, the cash flow statement deals only with cash inflows and outflows which actually happen. Simply put, it shows us whether or not the company in question can “pay the bills” given the cash it generated this period.
Now, referring to the link to an example above, we can look at the cash flow statement from top to bottom. It is broken up into cash flows which are provided by or used in three major sections: Operating Activities, Investing Activities, and Financing Activities.
To calculate cash flows, we start with net income. Net income, you will remember, comes from the bottom line on the income statement. You’ll remember that net income included the capitalized value of several non-cash categories in order to attempt to quantify the complete value of a company. Thus, when we want disregard these things and look only at the cash the company is able to generate, we must make adjustments in at the following categories:
From Operating Activities
Depreciation - is added back into net income since often times there is no actual cash used.
Changes in Accounts Receivable - If accounts receivable decreases from one period to the next, we can assume the company received the payment they were expecting in their accounts receivable. Thus, we add it back to net sales/net income. If accounts receivable increases, then we know that revenues in net sales are not from actual money the company received but more what it expects to receive. Thus, we subtract it.
Changes in Inventory - Inventory works the opposite way of changes to accounts receivable. Increases imply the company spent cash to increase inventory. Decreases imply the company received cash from selling inventory.
Changes in Liabilities - Again, if the liabilities account at the company decreases from period to period. You know that it spent cash to pay off liabilities. If it increases, then it can be added back into net earnings.
Adjustments to Net Income - These are adjustments made to net income to adjust for other non-cash items that were rolled into the net income calculation.
From Investing
Capital Expenditures - Cash used to buy additional equipment or inventory.
Investments - Cash either gained from cashing in a short term investment or used to purchase new investments.
Other Cashflows - Any other cash used or received from activities involving investment in equipment or assets.
From Financing Activities
Dividends Paid - Cash used to pay dividends.
Sale or (Re) Purchase of Stock - Cash gained from selling stock or lost from repurchasing it.
Net Borrowings - Cash generated or lost from borrowing or paying back debt.
Other Cash Flows from Financing Activities - Other financing activities which could include selling bonds, paying interest on bonds (though these two can be classified as borrowing activities).
Finally, after all these adjustments are added or subtracted, we adjust for any currency exchange and have a number representing Change in Cash and Cash Equivalents which should also the change from one period to the next of Cash and Cash Equivalents on the Balance Sheet of the company in question.
