Sources and Uses of Cash

Those activities that bring in cash are called sources of cash. Those activities that involve spending cash are called uses (or applications) of cash. What we need to do is to trace the changes in the firm's balance sheet to see how the firm obtained its cash and how the firm spent its cash during some time period.

To get started, consider the balance sheets for the Prufrock Corporation in Table 3.1. Notice that we have calculated the change in each of the items on the balance sheets.

Looking over the balance sheets for Prufrock, we see that quite a few things changed during the year. For example, Prufrock increased its net fixed assets by $149 and its inventory by $29. (Note that, throughout, all figures are in millions of dollars.) Where did the money come from? To answer this and related questions, we need to first identify those changes that used up cash (uses) and those that brought cash in (sources).

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