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Statement of Cash Flows

Autor:   •  July 31, 2019  •  Coursework  •  659 Words (3 Pages)  •  15 Views

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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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