Digging into the Statement of Cash Flows

Basically, a statement of cash flows gives the financial report reader a map of the cash receipts, cash payments, and changes in cash that a company holds, minus the expenses that arise from operating the company. In addition, the statement looks at money that flows into or out of the firm through investing and financing activities. As with the income statement (see Chapter 7), companies provide three years' worth of information on the statement of cash flows.

When reading the statement of cash flows, you should be looking for answers to these three questions:

✓ Where did the company get the cash needed for operations during the period shown on the statement — from revenue generated, funds borrowed, or stock sold?

✓ What cash did the company actually spend during the period shown on the statement?

✓ What was the change in the cash balance during each of the years shown on the statement?

Knowing the answers to these questions helps you determine whether the company is thriving and has the cash needed to continue to grow its operations or the company appears to have a cash-flow problem and could be nearing a point of fiscal disaster. In this section, I show you how to use the statement of cash flows to find the answers to these questions.

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