Analysis Using the Statement of Cash Flows
Read this chapter, which shows how to record cash flow from operating activities on the statement of cash flows. The chapter also provides an overview of cash flows from operating activities and steps in preparing a statement of cash flows, which will be covered in more detail in the resources that follow.
Uses of the statement of cash flows
The statement of cash flows presents the effects on cash of all significant operating, investing, and financing activities. By reviewing the statement, management can see the effects of its past major policy decisions in quantitative form. The statement may show a flow of cash from operating activities large enough to finance all projected capital needs internally rather than having to incur long-term debt or issue additional stock. Alternatively, if the company has been experiencing cash shortages, management can use the statement to determine why such shortages are occurring. Using the statement of cash flows, management may also recommend to the board of directors a reduction in dividends to conserve cash.
The information in a statement of cash flows assists investors, creditors, and others in assessing the following:
- Enterprise's ability to generate positive future net cash flows.
- Enterprise's ability to meet its obligations.
- Enterprise's ability to pay dividends.
- Enterprise's need for external financing.
- Reasons for differences between net income and associated cash receipts and payments.
- Effects on an enterprise's financial position of both its cash and noncash investing and financing transactions during the period (disclosed in a separate schedule).