Cash Flow Analysis

Cash Flow Analysis

Components of a Cash Flow Statement

The statement of cash flows shows the sources of income and expenses. The first section comprises operating activities derived from the income statement. The first component in operating activities is the net profit. Non-cash expenses such as depreciation and losses from the sale of assets do not take cash away from the business. These figures are added back to the net income. There also exist non-cash revenues, which do not bring cash to the business. These figures are subtracted from the net income to give a true reflection of the cash available. For example, gains from sale of assets.

Changes in current assets, such as accounts receivable and inventory, and current liabilities such as accounts payable are also analyzed. If the net change is positive, it is added to the net income and vice versa. Accounts receivable add money into the business whole accounts payable take money out of the business. The result is the cash resulting from operations of the business. The next section is investment. The fluctuations in non-current assets (long-term investments) either bring in or take out cash. Acquisition of plant, machinery, buildings and other long-term investments will cause an increase in cash inflow, while their sale will reduce the cash earned by a business. The rise or fall resulting from these activities is added or subtracted from the net income respectively.

The next component is financing. In this respect, changes in long-term liabilities and stockholder equity accounts are computed. Paying out a long-term loan takes money out of the business, and therefore subtracted from the net income. Whereas acquiring a long-term loan is added to the net income, as it results in an increase in cash inflow. Addition or subtraction of these figures results in the change in cash, a figure that is the difference between the beginning and the ending cash balance on the balance sheet. In addition, non-cash changes have to be indicated in the cash flow statement. For instance, if a loan was taken out to buy a long-term asset.

Benefits of a cash-flow analysis

            Analyzing the incoming and outgoing cash is vital especially for new firms. It helps a company to know the amount of money it has at its disposal at a particular point in time, hence lowering the possibility of a shortfall in money. The analysis is also used by investors in making investment decisions about a company. Before investing in a firm, an investor will examine the cash flow of the company to get knowledge on its financial performance (Mulford & Comiskey, 2005). The statement also provides a record to be used for comparison purposes. As it records the inflow and outflow of cash over a number of periods, it enables comparison of how cash has been earned and spent in the different periods.

With a record of its cash flow, a firm can determine if it is in a position to pay its employees and cover other urgent expenses (Debarshi, 2011). It is also able to make a budget. Based on the amount of cash it has, a company can plan on how much to spend or invest in the near future. Cash flow statements provide a basis for financial institutions on whether to give a long-term loan to a firm. A company with not only a good cash flow but also a well-kept cash flow statement will be in a better position to acquire long-term financing. Lack of a cash flow statement may lead to the collapse of a business.

Without knowledge of the amount of money at its disposal, a firm may spend money it does not really have, resulting in unnecessary debt. On the other hand, a firm may underestimate the amount of cash it has and fail to make profitable investments. As stated above, in addition to having a good cash flow, it is vital for a company to keep a comprehensive statement of its cash flows. In some instances, firms fail to secure financing and investors’ confidence not because of losses made but because of incomprehensive or no cash flow statements at all (Taparia, 2004). The table below is an illustration of a cash flow statement.

Table 1 Cash Flow Statement

Cash at the Beginning of the Period  


Operating activities: Cash flow      
Net income      




  Change in accounts receivable


  Change in accounts payable


Adjusted operating income    


Net cash flow from operating activities  


Cash flow from investment      
  Machine purchases  


  Purchase of tractor  


Net cash for investment    


Net cash flow from financing      
  Increase in short term loan


  Payment of long term loan


  Stock dividends  


Net cash from financing activities  


Net change in cash balance    


Cash at the end of the period    




To determine whether the final answer of the cash balance is correct, the figure should be the same as that computed in the balance sheet. In the example above, the $15,100 should be found as the balancing figure in the balance sheet.


Debarshi, B. (2011). Management Accounting. New Delhi: Pearson Education India.

Mulford, C. W. & Comiskey, E. E. (2005). Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance. New Jersey: John Wiley and Sons.

International Accounting Standards Board (2008). International Financial Reporting Standard IFRS. Minnesota: Kluwer.

Taparia, J. (2004). Understanding Financial Statements: A Journalist’s Guide. Oregon: Marion Street Press, Inc.
















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