Cash Flow Statement

"There is a huge difference between the business that grows and requires lots of capital to do so and the business that grows and doesn't require capital."

--Warren Buffett--

Defined: The statement of cash flows measures cash in and out for a specific period through operating, investing, & financing activities.

What it tells us: The statement of cash flows tells us whether the company made or lost cash and how this cash was obtained or spend.

Operating Activities

• • • Depreciation

    • Adjustments to Net Income

    • Changes in Accounts Receivable

    • Changes in Liabilities 

    • Changes in Inventories

      • • Total Cash Flows from Operating Activities

Investing Activities

• • Capital Expenditures

  • Investments

    • • Total Cash Flows from Investing Activities

Financing Activities

• • • Dividends Paid

    • Sale Purchase of Stock

    • Net Borrowings

      • • Total Cash Flows from Financing

Operating Activities

• • The primary amount of money should come from operating activities, not investing and financing.

Depreciation

• • Depreciation is not really a cash expense. 

  • It is an amount that is deducted from the total value of an asset that has previously been accounted for. (This is what happens when you buy a new car and drive it off the lot. The car will immediately lose value.) 

  • That is why it is added back into net sales for calculating cash flow.

Changes in Accounts Receivable

• • If accounts receivable decreases, this implies that more cash has entered the company from customers paying off their credit accounts

  • The amount by which AR has decreased is then added to net sales. 

  • If accounts receivable increases from one accounting period to the next, the amount of the increase must be deducted from net sales because, although the amounts represented in AR are revenue, they are not cash.

Changes in Liabilities

• • Paying off or adding to the debt of the company.

Changes in Inventories

• • An increase in inventory signals that a company has spent more money to purchase more raw materials. 

  • If the inventory was paid with cash, the increase in the value of inventory is deducted from net sales. 

  • A decrease in inventory would be added to net sales. 

  • If inventory was purchased on credit, an increase in accounts payable would occur on the balance sheet, and the amount of the increase from one year to the other would be added to net sales.

Total Cash Flows from Operating Activities

• •  Provides information regarding the cash-generating abilities of a company's core activities.

Examples of Inflows:

• • Proceeds from disposal of property, plant and equipment

  • Cash receipts from disposal of debt instruments of other entities

  • Receipts from sale of equity instruments of other entities

Examples of Outflows:

• • Payments for acquisition of property, plant and equipment

  • Payments for purchase of debt instruments of other entities

  • Payments for purchase of equity instruments of other entities

  • Sales/maturities of investments

  • Includes purchasing and selling long- term assets and other investments.

Capital Expenditures

• • Money used to purchase, upgrade, improve, or extend the life of long-term assets. 

  • Long-term assets are typically property, infrastructure, or equipment with a useful life of more than one year.

Total Cash Flows from Investing Activities

• • Reports the aggregate change in a company's cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries and changes resulting from amounts spent on investments in capital assets such as plant and equipment.

Examples of more common cash flow items stemming from a firm’s financing activities are:

• • Receiving cash from issuing stock or spending cash to repurchase shares

  • Receiving cash from issuing debt or paying down debt

  • Paying cash dividends to shareholders

  • Proceeds received from employees exercising stock options

  • Receiving cash from issuing hybrid securities, such as convertible debt

Dividends Paid

• • Dividends - a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves).

  • Money paid to shareholders during the period. 

Sale/Purchase of Stock

• • Receiving cash from issuing stock or spending cash to repurchase shares.

Net Borrowings

• • Receiving cash from issuing debt or paying down debt

Total Cash Flows from Financing

• • How much a firm raises in capital or pays it back to investors through the capital markets. 

Vocabulary

• • Cash Flow Statement

  • What is a Cash Flow Statement

Additional Reading

• • Kahn Academy

Student Activity

Review the cash flow statement for the company you have selected to review.