Fundamental Analysis
The Cash Flow Statement
As we mentioned in the introduction, there
are different groups of people who read the financial statements,
each looking for different types of information. Earnings
might be the most important area for investors, but the statement
of cash flow is extremely important to management, lenders,
and tax authorities as well as investors.
The cash-flow statement is fairly new to the financial statements
that companies report. In fact, it has only been a requirement
since 1988. Currently every public company filing reports is required to include
a cash flow statement within their quarterly and annual reports.
Cash flow is similar to the income statement in that it records
a company's performance over a specified period of time, usually
over the quarter or year. The difference between the two is
that the income statement also takes into account some non-cash
accounting items such as depreciation. The cash-flow statement
strips away all of this and tells you how much actual money
the company has generated. Cash flow shows us how the company
has performed in managing inflows and outflows of cash. It
provides a sharper picture of the company's ability to pay
bills, creditors, and finance growth.
Many of the items on this statement are also found in either
the income statement or the balance sheet, but here, they're
arranged to highlight the cash generated and how it relates
to reported earnings. The cash-flow statement is divided into
three parts:
| Statement of Cash Flow |
| Cash
from Operations |
- this is cash generated
from day-to-day business operations. |
| Cash
from Investing |
- cash used for investing
in assets, as well as the proceeds from the sale
of other businesses, equipment, or other long-term
assets. |
| Cash
from Financing |
- cash paid or received
from issuing and borrowing of funds. This section
also includes dividends paid. (Although it is sometimes
listed under cash from operations.) |
| Net
Increase or Decrease in Cash |
- increases in cash
from previous year will be written normally, and
decreases in cash are typically written in (brackets). |
Why is cash flow so important?
Unlike reported earnings, there is little a company can do
to manipulate their cash situation. Aside from outright
fraud, this statement tells the whole story - you either have
the cash or you don't. The cash flow statement requires just
as much attention as the other statements. At the very least,
look to see if the company is increasing cash over previous
years.
Below is an example of a statement of cash flow:
Cory's
Tequila Co.
Consolidated Statement of Cash Flow
(in millions, except per-share amounts)
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