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The uses of cash flow statement are as follows:
1. It is useful for short term financial planning about inflows and outflow of cash.
2. It helps in analysing the reason for the change in cash and cash equivalent balances of a company
3. It assists in determining and assessing liquidity and solvency positions of a company.
4. It enables to analyse and study the trends of receipts and payments of cash from various activities of a company and thereby helps in drafting various policy measures and short term planning.
5. It enables the segregation of cash flows from operating, investing and financing activities of the business separately.
6. It assists in making decision about distribution of profit with reference to the availability of cash.
The cash flow statement discloses how a company raised money and how it spent those funds during a given period. It is also an analytical tool, measuring an enterprise’s ability to cover its expenses in the near term. Generally speaking, if a company is consistently bringing in more cash than it spends, that company is considered to be of good value.
Cash from operations: This is cash that was generated over the year from the company’s core business transactions. Note how the statement starts with net earnings and works backward, adding in depreciation and subtracting out inventory and accounts receivable. In simple terms, this is earnings before interest and taxes (EBIT) plus depreciation minus taxes.
Interpretation:This may serve as a better indicator than earnings, since noncash earnings can’t be used to pay off bills.
Cash from investing: Some businesses will invest outside their core operations or acquire new companies to expand their reach.
Interpretation: This portion of the cash flow statement accounts for cash used to make new investments, as well as proceeds gained from previous investments. In Target’s case, this number in2006 was -4,693, which shows the company spent significant cash investing in projects it hopes will lead to future growth.
Cash from financing: This last section refers to the movement of cash from financing activities. Two common financing activities are taking on a loan or issuing stock to new investors. Dividends to current investors also fit in here. Again, Target reports a negative number for2006, -1,004. But this should not be misconstrued: The company paid off1,155 of its previous debt, paid out380 in dividends and repurchased901 of company stock.
Interpretation: Investors will like these last two items, since they reap the dividends, and it signals that Target is confident in its stock performance and wants to keep it for the company’s gain. A simple formula for this section: cash from issuing stock minus dividends paid, minus cash used to acquire stock.
