The Statement of Cash Flow: Three Examples

Statement of Cash Flows - Three Examples

1. How would you assess the overall cash flow trend of each firm?

There are reports cash in three sections in the cash flow statements that we have to consider: operating, investing and financing. The net cash and cash equivalent of each activities reports in the cash flow statement are the most important thing to go over. The cash flows from this section is always in the first section that shows the results of cash inflows and outflows related to their business core. (Julie H. Hertenstein & Sharon M. Mckinnon, 1997, p. 70).

It can simply explain in the simple situation as the cash flows from this section is calculated as cash received from customers less cash paid for recurring operating expenses. If the net cash in this section has the positive number, it can imply that there was more cash from customers than spent on expenses. If the company generate more cash from selling their products or services that be able to pay all of the recurring expenses such as employee’s salary, rents, suppliers, etc. and has money left over at the end of the year. Then the company would be able to invest their excess cash in other projects such as extend their business or invest in other sections. We should predict that the cost that a company needs to replace assets would be greater than the cost of older assets that are being depreciated. In this way, we expect that the investing activities section related to the purchase of fixed assets to exceed the annual depreciation.

The second section is the cash flows from investing activities. It the cash flows from investments in capital assets such as property and plant or equipment. It also includes the investments in other companies such as buying the stocks or securities of others companies or making and collecting of loans to others and acquiring and disposing of investments in debt and equity instruments. (David, F. Hawkins & Jacob, C. Cohen, 2007, p. 2). The interpret of this section is unlike the operating activities section, which if the net cash result from investing activities is a negative number, it means that the company is buying more property, plant, and equipment or making new investments in other companies. In the other hand, it could assume that if the number from this section is positive number against the net cash flows from the operating activities, it could be that the company is selling off its property, plant, and equipment or selling its investments in other companies in order to finance its operations.

And the last section is the cash flow from financing activities. It is the cash flows that show the change of the cash flows from the company’s liabilities and the stockholders’ equity (cite “The puzzle” pg. 70). The change in the company’s liabilities includes the changes in long-term debt and the change in the stockholders’ equity include the issuing stock, purchasing stock and also cover the dividend paid as well. We should observe that whether there is another major cash need in this section. If so, we should check that those need is necessary and are there available cash that could cover its shortfalls and consider whether the company are likely to be able to continue borrowing such funding, and how long. We also should examine the time limit of the funding source of fund and the impact on the company as well. Usually, the net cash flow from this section reflect the positive number, it could assume that the company is borrowing money or issuing new shares of common stocks. It might be good for the company in term of increasing more cash for using in the company, however, this could be the red flag for the company’s performance if the company only do these activities in order to cover its expense in the operations instead of generating from its core business.

After we understand the meaning of each section, then we could be able to measure the company’s financial health. By observing the bottom line of the statement of cash flow, the cash and equivalents at the end of the year should be positive and should constantly increase this amount every year. (Julie, H. Hertenstein & William, J. Bruns ,1993 p.3-4).

Do you have any concerns about the financial strength of any of the three businesses?

I have concern for all three firms in the different points according to their activities that affect their net cash flow at the end of the year.

For the Alpha company, the only concern is the point that the company record in no dividend in the last year. Even though paying the dividend is might not be the first priority when it comes to measuring the company’s financial health, it could be the thing that attracts more new investors to the company.

What I concerned about the Beta company’ financial strength is the decreasing in their accounts payable constantly. The increase in cash paid to suppliers and employees is not good for cash flow and it is reported as a negative of $77.82 million. The decrease in accounts payable is not good for cash since the company paid out cash for all those bills. And the most concerned for this company is in the financing activities section, which is the record of the