What is a Cashflow statement?
It shows how the business spent the cash it earned during the period and is usually the easiest financial statement to understand.
Essentially, it is a reconciliation of how the cash amounts on the Balance Sheet have moved from one period to the other by highlighting the key areas in which the business spent its cash during the intervening period.
So to explain a cash flow statement, I have extracted recent cash flow statements for Apple Inc (courtesy of Yahoo Finance).
The first item to note is that the Cash flow statement is trying to explain the increase in the cash position of $931mn, which is at the bottom of the statement. If you look at Apple’s Balance Sheet on my previous blog post on understanding a Balance Sheet http://bit.ly/ULe3cc you will see that Apple’s cash balances have increased from $9.815bn to $10.746bn over the year, an increase of $931mn, which is the change in the cash position for the year.
The cash flow statement always starts with the net profit for the period, which was $41.733bn after taxes etc for the year – this was the net income reported by Apple for the year-end in September 2012.
The cash flow statement is split into 3 parts – operating activities, investing activities and financing activities.
1. Operating activities
This section adjusts the net profit figure for non cash items such as depreciation, deferred tax and adjustments etc and also for changes in working capital during the period. Working capital items comprise changes to receivables, payables, stocks and other operating items to get the real cash generated by the business. This is the cash flow generated by the business and in Apple’s case amounted to $50.856bn.
2. Investing activities
This section highlights how the cash was spent, on investing activities such as fixed assets (capital expenditure) and on acquiring securities and other companies – in Apple’s case the cash was spent mainly on investments i.e. net buying Treasury bills and other securities of $38bn! The notes state that $151bn of securities were purchased and $113bn were sold or matured and a further $350mn of business acquisitions were made. Apple also acquired property, plant and machinery of $8.295bn and intangible assets of $1.505bn.
3. Financing activities
This section shows how much was spent on repaying borrowings, any cash raised from any new borrowings or from new share issues etc, which Apple did not have. This will also show any dividends paid to shareholders and any share buybacks. Apple had a net cash outflow of $1.698bn from financing activities, mainly from paying dividends.
Finally, the net of all these above will show the net increase or decrease in the cash balances between the two balance sheet periods.
In Apple’s case, it earned $50bn of cash and spent $49bn on assets, investments and dividends and still increased its cash by nearly a billion dollars!
So the cash flow statement can be very revealing in how a business spends it cash and also if it invests into assets for future growth, how that growth is funded, whether by borrowings or new issues of shares.
My last 3 blogs including this have been on how to read the key financial statements – Profit and Loss Account http://bit.ly/YwmZyf, Balance Sheet http://bit.ly/XMTzfa and the Cash Flow statement.
You would have learnt that to find out about the financial health of a business, you do have to read all three in conjunction and also delve into the notes attached to the formal financial statements.
However, it is important to remember that all these statements are based on the past and necessarily do not give a guide to the future performance of the business. So looking for trends in the figures and keeping up to date with news is essential.