Cash Flow Statement

Overview of the CFS

Definition

The CFS is a required financial statement that provides insight that the IS cannot—how much cash a company generates and from what activities

Purpose

The CFS reconciles net income to a company’s actual change in cash balance over a period of time (quarter/year)

Two options for reporting cash flows

Direct or Indirect method (most choose indirect)

Cash flow 3 components

Cash from operations, Cash from investing activities, Cash from financing activities

Cash from Operations

Start with net income and back all the noncash expenses and income out of net income, to get at “cash income” or “cash from operations”

CFO: Depreciation

Often the biggest adjustment, usually largest noncash expense included within net income C

CFO: Working Capital

Other major adjustment, current assets - current liabilities

A/R, inventories, prepaid expenses

working capital assets

A/P, accrued expenses, deferred revenue

Working capital liabilities

Increase in assets effect on WC

Usage of funds (outflow) I

Increase in liabilities/equity effect on WC

Source of funds (cash inflow)

CFO: Other items

Asset write downs/impairments C

Cash from Investing Activities (CFI)

Tracks additions and reductions to fixed assets and investments during the year

Capex (outflow), Purchase of intangible assets (outflow), Asset sales (inflow), Purchases and sales of debt & equity securities (outflow/inflow)

Most common investing inflows/outflows

Cash from Financing Activities (CFF)

Tracks changes in the company’s sources of debt and equity financing (corresponding primarily to the liabilities and shareholder’s equity side of the balance sheet).

Issuance/repayment of debt (inflow/outflow), common stock issued/repurchased (inflow/outflow), payment of common & preferred dividends (outflow)

Most common financing inflows/outflows

CFS effect

Identifies the year-over-year change of every BS line item that affects cash Wor

Working capital

Net difference between a company’s current assets and current liabilities and reflects its liquidity

Working capital ratio

Measuring a company’s current assets as a proportion of its current liabilities rather than as an integer

Working capital ratio formula

Current assets/Current liabilities

Positive WCR

Net positive working capital

Negative WCR

Below 1.0x, net negative working capital

Net working Capital (NWC)

Current assets - Operating current liabilities

Represents the surplus of current operating assets over liabilities