subject: The Edge Through the Cash Flows Statement [print this page] Sitting in countless accounting classes you tend to pick-up a thing or two about the real life importance of it all. Despite the fact that debits, credits, balance sheets, and statements of cash flows don't seem to have much significance as they lie on countless stacks of papers or glow dimly upon your computers monitor looking like a jumble of numbers and columns; they are becoming increasingly more valuable in this ever shaky market and economy to those looking to incest on their own. If one can learn the basics of a cash flow statement, they can gain that ever elusive edge upon investments and personal gains.
When a company reports positive earnings most would assume that this is all cash; which, will translate into positive earnings for shareholders. This is not always the case as the reported earnings takes into account noncash items as they use an accrual method, take for example that a company reported an annual earnings of around $500 million of all that there is a chance that only a portion of it such as $100 million of it is actually cash, the rest being assets of the company. You should not let this intimidate you though, as there is a way to help you figure out the health of a company, despite the fact that you don't know exactly how much cash they are actually sitting on. One good means to this is the cash flows statement, submitted by companies along with their financial statement, which also includes the balance sheet and income statement.
Unlike the balance sheet and income statement, the cash flows statement acts as a record of the company's transactions, allowing you a view into how they spend their money and determining if it would benefit you to invest in them. The cash flows shows the normal activities of the company in the operation of activities section showing how much is spent running the production process, the investing activities, and lastly the financial activities section that can show how much the company owes out on loans and gives an idea of its financial situation.
Starting from the bottom to the top of the cash flows statement , the bottom lines of a cash flows statement will show you the cash balances at the beginning and end of different fiscal periods, helping you gauge how steady the company is retaining earnings. Above these lines are the Uses of Funds columns. These show whether or not there were issuances of capital stocks/ debt, financial activity, and most important to you, the investor, payment of dividends. Giving you a glimpse into whether it would be a worthwhile investment. The grouping above these, show the flow of operations, investments, and financial activities. These rows show the company's net income/loss, amount tied in investments and property, and net changes to assets and liabilities.
Despite the fact that there is little room for play in this statement, as it is required by the Securities and Exchange Commission better known as the SEC, there are still many details which are not tied into this statement. It leaves out important facts such as accounts payable (telling who and how much the companies owes out to others) and accounts receivable (showing how much others owe the company) meaning you do not have a clear view of the well being. It also neglects to show the assets of the company and the liabilities, two very important attributes, as the cash flows statement is truly and over view of the activates/ spending of the company.
By comparing this with other companies you are already ahead of those who just peer over the company's stock history hoping to decipher a pattern in the trends. Although, very valuable is just on link in a chain of many valuable commodities you learn through the many aspects of accounting many of which can be found in a company's financial statement, it is not meant to be entirely relied upon alone as leaves out acct.'s receivable and payable. Despite this, if you look at this along with other statements you can get a good view of where the company is heading and where it can take you and your financial future.
The Edge Through the Cash Flows Statement
By: Nathan Warren
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