cash flow analysis
Cash Flow analysis
Introduction
Clearly, income statements and statements of financial position are the most common financial documents available to the public. But managers who make financial decisions may find themselves at something of a loss if they only have these two documents (reports on past performance) on which to base their decisions for today and into the future.
Financial managers and investors, however, are far more interested in actual cash flows than they are in somewhat artificial, back-ward looking accounting profit listed on income statements. This is very important distinction between the accounting and finance point of view. Finance professionals know that the firm need cash, not accounting profit, to pay the firm’s obligation as they come due, to fund firm’s operation and growth, and to compensate the firm’s ultimate owners (its shareholders). Thus, the statement of cash flows is a financial statement that shows the firm’s cash flows over a given period of time. This statement reports the amount of cash that the firm generated and distributed during a particular time period. The bottom line on the statement of cash flows 9the difference between cash resources and uses) equals the change in cash on the firm’s statement of financial position from the previous year’s cash account balance. That is, the statement of cash flows reconciles income statement items and noncash statement of financial position items to show changes in the cash and marketable securities account on the statement of financial position over the particular analysis period.
Usefulness of the statement of cash flows
“Happiness is a positive cash flow” is certainly true. Although net income provides a long-term measure of a company’s success or failure, cash is its lifeblood. Without cash, a company will not survive. For small and newly developing companies, cash flow is the single most important element for survival. Even medium and large companies must
Introduction
Clearly, income statements and statements of financial position are the most common financial documents available to the public. But managers who make financial decisions may find themselves at something of a loss if they only have these two documents (reports on past performance) on which to base their decisions for today and into the future.
Financial managers and investors, however, are far more interested in actual cash flows than they are in somewhat artificial, back-ward looking accounting profit listed on income statements. This is very important distinction between the accounting and finance point of view. Finance professionals know that the firm need cash, not accounting profit, to pay the firm’s obligation as they come due, to fund firm’s operation and growth, and to compensate the firm’s ultimate owners (its shareholders). Thus, the statement of cash flows is a financial statement that shows the firm’s cash flows over a given period of time. This statement reports the amount of cash that the firm generated and distributed during a particular time period. The bottom line on the statement of cash flows 9the difference between cash resources and uses) equals the change in cash on the firm’s statement of financial position from the previous year’s cash account balance. That is, the statement of cash flows reconciles income statement items and noncash statement of financial position items to show changes in the cash and marketable securities account on the statement of financial position over the particular analysis period.
Usefulness of the statement of cash flows
“Happiness is a positive cash flow” is certainly true. Although net income provides a long-term measure of a company’s success or failure, cash is its lifeblood. Without cash, a company will not survive. For small and newly developing companies, cash flow is the single most important element for survival. Even medium and large companies must