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Cash Flow Statement

Financial Accounting Course By Sashi Dasika on Sunday, December 16, 2012

Many financial analysts believe cash flow is king and I have to agree with them. Generating excess cash from operations is the goal of all profit making companies. The cash flow statement focuses on the ability of business to generate cash internally to meet its liabilities and debts and have enough to reinvest in the businesss future growth. Cash flow statement essentially shows how the cash at beginning of the one accounting period changes to what cash is present at the end of the period. It mostly includes cash and cash equivalents like Checks, Money orders and other short-term highly liquid instruments with maturities in less then 3 months or less. The cash flow statement contains changes to cash from three different categories: 1. Operations 2. Investments 3. Financing The cash flow reports the above activities on accrual basis, revenues when earned, and expenses when incurred. The cash flows statement essentially links financial statements from open accounting period to another by keeping track of changes in cash, and other balance sheet permanent accounts. There are essentially 2 ways to interpreting cash from operations (working capital) : Direct method by using gross receipt ands and payments

Almost all companies use indirect method where net income is adjusted with other non-cash items to get net cash flow from operations. Cash flow from operation arises from production and sale of goods and or services.

Interpreting cash flow from investments can be determined by accounting for cash inflows and outflows from purchases and sales of operational and other productive assets like plant, property, and equipment and also investments of the business. Interpreting cash flows from financing can be determined by accounting for cash inflow and outflows from external sources of the business like creditors and stakeholders. The long-term growth of any business is generally funded from these 3 sources of capital: 1. Retained Earnings from Operations 2. Issuance of additional stock to share holders 3. Borrowing money from creditors In order to analyze cash flow statement requires detailed analysis of balance sheet and income statement. In summary, any event or transaction that changes cash must also come with change in liabilities, shareholders equity and or non-cash assets. Noncash investing and financing that does not affect cash flows are reported as supplement to the cash flow statements, some common examples included purchase of fixed assets with long-term note payables or stock issuance etc. Publicly traded companies report the cash flow statements every quarter to SEC and general public. Shareholders generally use Cash flow statement also gives clues if stockholders can expect to paid dividends etc. Analysts use it to predict and evaluate

businesss growth potential and long-term stability. Creditors use cash flow to evaluate businesss ability to pay off debt for future loans.