Cash Flow Statements

The cash flow statement can be described as where got where gone. That is it
shows where a business entity gets its cash from, how it flows through the business
and where it goes in terms of using it on the expenses of the business such as cash
for telephone bills, salary payment and so on. The cash flow statement can be
prepared on a monthly, quarterly or yearly basis (Wood & Sangster, 2005).

The cash flow statement is one of the three financial records commonly used to
measure and report the financial position of a business entity (Atrill & McLaney,
2013). According to Atrill & McLaney (2013), there are aslo the income statement
and the statement of financial position otherwise known as the balance sheet. The
cash flow statement, as the name implies, only shows the source of cash and how it
is used, the income statement shows the profitability of the business ( Hofstrand,
2009)and the balance sheets shows the assets a company has, the liabilities they
have to fulfill and the working capital (Wood & Sangster, 2005).

The cash flow statement is important in that we can deduce the liquidity and
solvency of a business entity from it. Liquidity is defined as the money a business
entity has on hand that can enable it meet is financial obligations or for investment
purposes. This is shown on the cash flow statement as the balance at the end of the
period (Wood & Sangster, 2005). If there is a positive cash balance at the end of
the period and these trends continues, it shows that the business is sustainable but
if there is a trend of negative cash balance which is continuous too, then there is
cause for concern and there is need to really evaluate why there is not enough cash
for the business overtime.

It also shows if a business entity is able to generate the much needed cash required
to run its business. This is usually deduced from the cash used for operating
activities on the cash flow statement. Management and investors alike tend to
follow the historical data of the business entity cash flow by following the trend of
the source of cash for the business. A healthy business is said to be one that have a
positive figure from its cash flow from operating activities. Even though a negative
figure does not immediately specify that the business entity is not healthy, but
allowing the trend to continue over time will definitely portray the business as
having some issues and not healthy for investment. See examples of a healthy cash
flow from operating activities of two businesses

Notes for use in Figures

COA - Cash flows from Operating Activities
COI - Cash flows from Investing Activities
COF - Cash flows from Financing Activities

Healthy COA: Intel Corporation is trending very good cash inflow from operating
activities
Intel Corp.
 2012 2013 2014 2015 2016
COA 20.96 18.88 20.78 20.42 19.02
B B B B B
Figure 1: Source (MarketWatch - Intel Corp., 2016)

Cause for Concern: Sears Holdings Corp inflow of COA is a cause for concern as it is
negative and the trend has continues for over a five year period.

Sears Holdings Corp

2012 2013 2014 2015 2016
COA (275 (303 (1.11 (1.39 (2.17B)
M) M) B) B)
Figure 2: Source (MarketWatch - Sears Holdings Corp, 2016)

The cash flow statement shows if a business entity is able to invest or not. And it is
believed that investment sometimes lead to profitability as there is high hope for
the investment to start yielding profits in the nearest future. If the cash from
operating activities can conveniently handle its cash used in investing activities and
still have some cash at hand for further investment, then the company is said to be
healthy.

Healthy Cash Flow Statement: From this cash flow statement, we can deduce that
Wal-Mart Stores is investing as depicted by the negative no in COI

Wal-Mart Stores Inc.

2012 2013 2014 2015 2016
COA 24.26B 25.29B 23.26B 28.56B 27.39B
COI (16.61B) (12.61B) (12.3B) (11.13B) (12BM)

COF (8.46B) (11.9B) (11.02B) (15.07B) (14.8B)

Figure 3: Source (MarketWatch - Wal-Mart Stores Inc., 2016)

Cause for concern: From this cash flow statement, it is evident that Eastman Kodak
is not investing but rather selling off some of its asset as is evident with the positive
figure from COI

Eastman Kodak Co.

2012 2013 2014 2015 2016
COA (998M) (262M) (663B) (128B) (95BM)

COI (25M) 25M 760M 41M (51M)

COF 246M 508M (370M) (7M) (1M)
Figure 4: Source (MarketWatch - Eastman Kodak Co., 2016)

Cash flow statement is also very important because it recognizes the usefulness of
cash in a business. Cash is used to settle business obligations and also used when a
 business want to benefit from any commercial prospect that might come its way.
The lack of cash will adversely affect the operations of the business as it is
important to the survival of a business entity. That is why cash is considered the
king of business asset (Atrill & McLaney, 2013). As such from the cash flow we can
easily see if there is a need to inject more cash into the business or prevents the
addition of debts. There are two methods of preparing the cash flow statement
(CFS): the direct and the indirect methods.

The Direct Method

Furnaad Arriva
Statement of Cash Flows
for the year ended 12/31/x1

Cash flows from operating activities

Cash receipts from customers N673,225
Cash paid to suppliers (419,650)
Cash for operations (184,625)
Cash for taxes (16,975)
Net cash from operating activities N 51,975

Cash flows from investing activities

Purchase of equipment (35000)
Proceeds from sale of equipment 19075
Net cash used in investing activities (15925)

Cash flows from financing activities

Proceeds from issuance of common stock 63,000
Payment of long-term debt (43,925)
Dividends paid (86,975)
Net cash used in financing activities (67900)

Net increase in cash and cash equivalents (31850)

Cash and cash equivalents at beginning of period 107,275
Cash and cash equivalents at end of period N 75,425
 The Indirect Method

Furnaad Arriva
Statement of Cash Flows
for the year ended 12/31/x1

Cash flows from operating activities

Net income N 103,250
Adjustments for:
Depreciation and amortization N 26,250
Loss on sale of equipment 7,175
Prepaid Insurance 1,225
Short Term Note 5,250
Increase in Account receivables (21,525)
Increase in inventories (29,750)
Decrease in Account payables (39900)
Total adjustments (51,275)
Cash generated from operations N 51,975

Cash flows from investing activities

Purchase of equipment (35,000)
Proceeds from sale of equipment 19,075
Net cash used in investing activities (15,925)

Cash flows from financing activities

Proceeds from issue of common stock 63,000
Payment of long-term debt (43,925)
Dividends paid (86,975)
Net cash used in financing activities (67900)

Net increase in cash and cash equivalents (31850)

Cash and cash equivalents at beginning of period 107,275
Cash and cash equivalents at end of period N 75,425
From the two methods illustrated above, it can be inferred that the major difference between the
direct and indirect method of preparing a cash flow statement is in the cash flows from operating
activities. While the direct method list the cash flows from the cash from customers, cash paid to
suppliers and cash for operating expenses, interest and taxes, the indirect method, in contrast
shows the net income and the all necessary adjustments that are needed to transform the net
income which is accrual to the cash amount from operating activities as only cash activities can
be shown on the cash flow statements (Averkamp, n.d.)

Also it can be inferred from the two methods illustrated above that their similarities lies in the
cash flows from investing and financing section of the cash flow statements as they are
calculated using the same cash activities pertaining to investing and financing activities of the
business. Also both methods results in the same amount as the Net Change in Cash which depicts
the changes in the cash from the previous period and the cash from the current period.

References

Atrill, P. and McLaney, E. (2013) Accounting and Finance for Non - Specialists 8th Ed.
Harlow, Essex: Pearson Education Limited.

Averkamp, H. (n.d.). What is the difference between the direct method and the
indirect method for the statement of cash flows? [Online] Available from:
http://www.accountingcoach.com/blog/direct-and-indirect-method-cash-flows
(Accessed: 16 August 2016)

Hofstrand,
D (2009). Understanding Cash Flow Analysis. [Online] Available from:
https://www.extension.iastate.edu/agdm/wholefarm/html/c3-14.html (Accessed: 16
August 2016)

MarketWatch- Eastman Kodak Co. (2016). Eastman Kodak Co. [Online] Available
from: http://www.marketwatch.com/investing/Stock/KODK/financials/cash-flow
(Accessed: 18 August 2016)

MarketWatch- Intel Corp. (2016). Intel Corp. [Online] Available from:

http://www.marketwatch.com/investing/stock/intc/financials/cash-flow (Accessed: 18
August 2016)
MarketWatch- Sears Holdings Corp (2016). Sears Holdings Corp. [Online] Available
from: http://www.marketwatch.com/investing/stock/shld/financials/cash-flow
(Accessed: 18 August 2016)

MarketWatch- Wal-Mart Stores Inc. (2016). Wal-Mart Stores Inc. [Online] Available
from: http://www.marketwatch.com/investing/stock/WMT/financials/cash-flow
(Accessed: 18 August 2016)

Wood, F. & Sangster, A. (2005). Business Accounting, 10 th Ed. Harlow, Essex:

Pearson Education Limited