Statement of Cash Flows

The Statement of Cash Flows

• Back in module three, we learned about two of the three
• primary financial statements in accounting:
• the balance sheet and the income statement.
• In this module, we'll cover the last of the three:
• the statement of cash flows.
• The purpose of the statement of cash flows
• is to provide a more detailed picture of what happened
• to a business's cash during an accounting period.
• It shows the different areas in which a business
• used or received cash
• and reconciles the beginning and ending cash balances.
• Remember that in accrual accounting,
• expenses and revenues are not necessarily recognized
• when cash is paid or received.
• A business that reports $10,000 of net income
• may not have increased its cash by $10,000.
• Some of that income could be in the form of a receivable
• or could have been spent on purchases of assets
• or loan repayments.
• A business can have a positive net income
• for a given period of time while incurring negative cash flows.
• To gain a better understanding
• on the importance of the statement,
• we'll hear from Geoff Ruddell,
• a senior retail analyst at Morgan Stanley
• who specializes in the European retail sector.
• My name's Geoff Ruddell.
• I've been at Morgan Stanley for nine years
• as a senior retail analyst.
• I'm a managing director here.
• Before I came to Morgan Stanley I was at Deutsche Bank
• doing a similar role for seven or eight years before that.
• Before that I worked briefly in strategy
• for one of the big UK retailers.
• Before that I trained as an accountant
• and I read PPE at Oxford many years ago.
• Cash flows could be a very important statement
• in addition to the profit and loss account.
• In fact in many ways it's a more important statement.
• The cash flow can be much more informative as to whether
• a company is really making cash, really making money.
• The profit and loss is much more easy to...
• manipulate is a strong word.
• But there are accounting practices that can make
• a big difference to an earnings number,
• whereas the cash, it's much harder to make adjustments
• to that figure.
• From a cash flow statement, one is mainly looking to see
• if a company is actually generating cash.
• It sounds obvious, but it's a simple point.
• So for example, cash conversion.
• How much of the earnings a company is generating
• is really being delivered as extra cash
• that can be distributed back to shareholders?
• Or can be reinvested in a company's future?
• It's all very well expanding a business such as a retailer.
• But if you need to spend so much money on capital investment
• in order to grow the space,
• and then spend an awful lot more money on working capital
• in order to fill that out,
• then you could end up having a business
• that is theoretically growing its earnings very fast,
• but is generating no actual cash for shareholders.
• While net income is very meaningful
• for performance evaluation, cash flows are important
• for valuing a business and managing liquidity.
• Even for evaluating performance, it's essential to understand
• where actual cash is being generated and used.
• The statement of cash flows gives more detail
• about the sources of cash inflows
• and the uses of cash outflows.
• To illustrate these concepts, we'll go back to Apple
• and we'll introduce FC Barcelona,
• the Catalan professional soccer club based in Spain,
• arguably one of the best-known sports teams in the world.
• The sources of information for creating the statement
• of cash flows are: balance sheet for the beginning
• and end of the period,
• income statement for the period
• and some transactional data.
• The sections of a statement of cash flows are:
• operating activities, investing activities
• and financing activities.
• As with the balance sheet, the format of the statement
• is slightly different between U.S. GAAP and IFRS.
• We'll point out these differences as we walk through
• each of the sections in detail next.[pic 1]

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