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4.3 Cash Flow Statement

PLEASE NOTE: This book is currently in draft form; material is not final.

Learning Objectives

  1. Describe what a statement of cash flows is.
  2. Explain how to read a cash flow statement.
  3. Describe what factors influence a cash flow statement.

The ability to generate cash is vital to the success of a company. The statement of cash flows is a summary of cash flows over the period of time reported. Cash flows are the difference between what a company brings in and what it pays out. Companies need to generate enough income from operations to fund the future growth of the firm and any future investments in capital or securities and provide a solid investment for investors.

The statement of cash flows includes cash flows from operating, investing and financing cash flows. Operating cash flowsRevenues generated from the operations of a company. Generally defined as revenues less all operating expenses. are cash flows provided from normal business operations. Operating cash flows also accounts for non-cash items such as depreciation and the change in working capital. Investing cash flowsCash flows received from investments or other non-day to day activities. are cash flows received from investments such as the buying and selling of fixed assets in our own firm or financial investments in other firms. Financing cash flowsCash flows generated from external activities. are those received from financing activities. This includes debt such as principal payments on loans, equity or selling investments. This section also includes dividend payments and stock repurchases.

Cash flow from operating activities can be either positive or negative: when a firm earns revenue, cash flows are positive, when it pays expenses, cash flows are negative. Of great importance to investors is the ability of the firm to generate positive cash flow. If not, survival will not be for long. A pro-forma statement of cash flows is shown in Figure 4.3 "Pro-Forma Statement of Cash Flows".

Figure 4.3 Pro-Forma Statement of Cash Flows

Key Takeaways

  • Cash flows are vital to the health of a business.
  • The statement of cash flows consists of cash from operating, investing and financing activities.

Exercises

  1. Review the following 10-K statements

    1. Here is a link to Nike’s 10-K.

      http://nike.q4cdn.com/25140a27-0622-47e1-9f85-99892a766984.pdf?noexit=true

      Look at the Statement of Cash Flows on page 58. Can you identify the cash from operating activities? From financing activities? From investing activities?

    2. Here is a link to Starbuck’s 2011 10-K.

      http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol -SECText&TEXT=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDExOTMxMjUtMTEtMzE3MTc1L3htbA%3d%3d#toc232803_21

      Look at the Statement of Cash Flows on page 45. Can you identify cash from operating activities? Cash from investing activities? Cash from financing activities?

  2. Last year, Sun Skateboards had $50,000 in operating cash flow, $45,000 in financing cash flow and $30,000 in investing cash flow. Generate a statement of cash flows for Sun Skateboards.