“Cash is King.”
Unknown
Cash came in from where? Cash went out to where?
Just like our balance sheet post and equity post, understanding the fundamentals of a cash flow statement is important for a father’s potential future investments and general grasp of how corporations work.
Important Concepts of the Cash Flow Statement
- Net Income is not cash flow, however you can compare against your cash flow from operations to determine the quality of the earnings of a company.
- Net income is regarded as the single best measure of a company’s economic performance.
- Total cash flow of the firm includes adjustments for capital spending and additions to net working capital.
The Three Components of the Cash Flow Statement
- Operating: Money made from sales (a McDonald’s Big Mac)
- Investing: Money used to buy property and equipment (the fryers)
- Financing: Paid dividends, got new loans, paid off old loans (for McDonald’s to expand)
1. Cash Flow from Operations:
- Net Income
- Depreciation
- Deferred Taxes
- Changes in Current Assets & Liabilities
- Accounts Receivable
- Inventories
- Accounts Payable
- Accrued Expenses
- Other
- Total Cash Flow From Operations
2. Cash Flow from Investments
- Growth in Property, Plant and Equipment (PPE)
- Growth in Intangible Assets
3. Cash Flow from Financing
- Change in notes payable
- Net proceeds from long term debt sales
- Dividends
- Repurchase of stock
- Proceeds from issuance of new stock
How to Figure Out the Cash Flow of a Firm
1. Figure out the cash flow from operations.
Operating cash flow = earnings before interest + depreciation – taxes
(Remember that cash flows from assets = cash flow to creditors + cash flow to equity investors.)
2. Calculate capital spending.
Ending Net fixed assets – beginning net fixed assets + depreciation
3. Determine if there are any additions to net working capital.
4. Then you can determine Cash Flow:
Cash Flow = Operating cash flow – capital spending-additions to net working capital
Like the balance sheet and income statement, all publicly held firms, like Amazon, will post their statement of cash flows in their financial reporting. Check out this example from CFI:
