Introduction
The cash flow statement is the third major financial statement that is mandated by the Securities Exchange Commission. Every public company must produce a statement of cash flows that highlights the acquisition and disposition of cash, for operations, investment and finance. The cash flow statement can lend context to the income statement and balance sheet both, which makes it a valuable statement to examine. One key difference between the cash flow statement and the other two is that there are not many ratios with which to perform analysis. Analyzing the cash flow statement is a little bit more intuitive.
As with the other statements, the cash flow statement is produced to help provide transparency to an organization’s stakeholders, and assist with evaluating the financial condition of the company. There are key financial stakeholders such as the shareholders and the creditors, but many other stakeholders as well such as customers, employees and management, competitors and potential investors as well as regulators.
Three Parts of the Cash Flow Statement
The cash flow statement breaks down a company into three types of activities. The operating activities are just that – the operations of the company. This section of the cash flow statement can provide important context to the income statement in particular. For example, the income statement can show that the company is turning a profit, but some of that profit (or loss) can be non-cash items. The operating cash flows breakdown can help because it removes the non-cash items from the income statement. Thus, expenses such as depreciation are removed, as well as non-cash writedowns that might occur. There are many instances where a company’s net income can vary considerably from year to year but the operating cash flows do not. In such a situation, the company’s operations haven’t changed much and the net income swings are due to non-cash items.
The second part of the cash flow statement is the cash from investing activities. Companies can invest not only in securities but in building out infrastructure. Investing activities will typically reflect these flows....
References
Ford Motor Company 2012 Annual Report. In possession of the author
Investopedia (2018) What is cash flow from operating activities. Investopedia. Retrieved July 1, 2018 from https://www.investopedia.com/terms/c/cash-flow-from-operating-activities.asp
Morningstar (2015) The statement of cash flows. Morningstar. Retrieved July 1, 2018 from http://news.morningstar.com/classroom2/course.asp?docId=142913&page=4
Way, J. (2018) What is the importance of a company’s financial statements. Houston Chronicle Retrieved July 1, 2018 from http://smallbusiness.chron.com/importance-companys-financial-statements-21332.html
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