Cash Flow Statements
Not all profit will be in cash, for example if it has not been paid yet, and nor will all costs have been paid.
The Cash Flow Statement therefore lists how much cash the company generated and how much capital is tied up in the business.
If the levels of cash and profit differ too much then investors should be cautious.
Operations 1.
The first line is the profit from the income statement but adjusted for items the company has not yet paid for; items paid for in this sector but recorded in previous profit; and items the company has not yet been paid for.
2.
Includes depreciation and amortisation in order to offset these against profit.
This means that when a company needs to buy new equipment or buildings it is spread out over many years and the cost is not included in only one year.
This means financial statements should be more consistent and easier to analyse over time.
3.
Deferred tax is included as an outflow.
4.
This leaves net cash flow from operating income.
Investing The investing section includes expenditures on equipment or assets as well as income from investments and dividends.
This section is often negative due to the purchase of assets.
Financing The financing section includes outflows and inflows.
The outflows may be interest paid on loans, leases, dividends paid and interest paid to bond holders.
Inflows may include equity and bond issues and borrowing.
There is usually a net outflow unless a company is raising money to expand.
If cash is lagging behind profit for a few periods, investors should be worried as the company may eventually have cash flow issues and may not be able to service debts or pay for inputs, which can lead to bankruptcy.
Lots of cash also means the company can increase shareholder income through dividends and share buybacks; or can use the cash to fund expansion, either organic or through acquisitions; or the company could spend more on improving its product or service through research and development.
Successful investors consider cash flow to be one of the most important aspects of a company.
If a company has lots of cash it will generally be more stable and able to cope with market problems, as well as being able to expand or increase investor returns.
Many investors, especially beginners, concentrate on the Income Statement, however the Cash Flow Statement is equally, if not more, important as cash is the life blood of a company, and Cash Flow Statements are harder to manipulate.
The Cash Flow Statement therefore lists how much cash the company generated and how much capital is tied up in the business.
If the levels of cash and profit differ too much then investors should be cautious.
Operations 1.
The first line is the profit from the income statement but adjusted for items the company has not yet paid for; items paid for in this sector but recorded in previous profit; and items the company has not yet been paid for.
2.
Includes depreciation and amortisation in order to offset these against profit.
This means that when a company needs to buy new equipment or buildings it is spread out over many years and the cost is not included in only one year.
This means financial statements should be more consistent and easier to analyse over time.
3.
Deferred tax is included as an outflow.
4.
This leaves net cash flow from operating income.
Investing The investing section includes expenditures on equipment or assets as well as income from investments and dividends.
This section is often negative due to the purchase of assets.
Financing The financing section includes outflows and inflows.
The outflows may be interest paid on loans, leases, dividends paid and interest paid to bond holders.
Inflows may include equity and bond issues and borrowing.
There is usually a net outflow unless a company is raising money to expand.
If cash is lagging behind profit for a few periods, investors should be worried as the company may eventually have cash flow issues and may not be able to service debts or pay for inputs, which can lead to bankruptcy.
Lots of cash also means the company can increase shareholder income through dividends and share buybacks; or can use the cash to fund expansion, either organic or through acquisitions; or the company could spend more on improving its product or service through research and development.
Successful investors consider cash flow to be one of the most important aspects of a company.
If a company has lots of cash it will generally be more stable and able to cope with market problems, as well as being able to expand or increase investor returns.
Many investors, especially beginners, concentrate on the Income Statement, however the Cash Flow Statement is equally, if not more, important as cash is the life blood of a company, and Cash Flow Statements are harder to manipulate.