Subscriber only lesson.
Sign up to this course to view this lesson.
About this lesson
The Cash Flow Statement is a financial report that shows how well the company was able to convert business activity into cash over some time period. This lesson will focus on uses of cash.
Download this lesson’s related exercise files.Cash Flow Statement Part 3.docx
255.7 KB Cash Flow Statement Part 3 - Solution.docx
Cash Flow Statement Part 3
The Cash Flow Statement is a financial report that shows how well the company was able to convert business activity into cash over some time period. This module will focus on uses of cash.
When to Use Cash Flow Statements
Cash Flow Statements are calculated for some time period, typically a month, quarter, or year. It is often used in conjunction with the Earnings Statement and Balance Sheet to ensure a complete picture of financial health of a company.
- The Cash Flow Statement is focused on the generation and use of cash.
- The Cash Flow Statement starts with the Net Income for the time period as calculated on the Earnings Statement.
- The Cash Flow Statement looks at the change in the balance of business accounts over the time period to determine if they reflect an increase in cash or a use of cash.
- The Net Cash Flow is added (or subtracted) from the original cash balance at the start of the period to determine the ending cash balance.
- The Cash Flow Statement categorizes the accounts into three categories: Cash for Operating Activities, Cash from Investing Activities, and Cash from Financing Activities.
- Operating Activities can become sues of cash if the business has been growing very fast or if the business is not managed well. This category starts with the Net Income earned during the period. If the Net Income was a loss, than it is a use of cash.
- Then changes to the amount of money in the operating accounts of Inventory, Accounts Receivable and Accounts Payable can become uses of cash.
- An increase in Accounts Receivable is a use of cash since the company is essentially loaning money to its customers.
- An increase in Inventory is a use of cash since more money is needed to buy parts and store them on shelves.
- A decrease in Accounts Payable is a use of cash since cash is being sent quicker to the suppliers.
- Investing Activities are normally the primary use of cash. In some cases, investments are sold to generate cash but that money is often immediately reinvested in something else. Typical investments are:
- The external purchase or acquisition of an asset such as land, building equipment, or even other companies.
- The internal development of a new asset such as a new system or building a new building.
- The acquisition of financial investments such as stocks or bonds.
- Some typical Financing Activities are uses of cash. However, as operating managers, we seldom are involved with financing activities. These activities will use cash in several ways:
- Repaying the principal on short-term or long-term loans.
- Payments to bond holders.
- The repurchase of the company’s own stock.
- Distributing dividends to owners.
Hints and Tips
- Many companies will subdivide some of these accounts for greater insight.
- Investments may be divided into facilities, equipment, and acquisitions.
- Do not confuse cash with profit. You can increase cash and kill the business, or you can show a great deal of profit and run out of cash – especially in an accrual business.
- There are often both sources of cash and uses of cash in each of the three categories.
Lesson notes are only available for subscribers.
PMI, PMP and PMBOK are registered marks of the Project Management Institute, Inc.