How to Evaluate a Cash Flow Statement

Video Transcript

"My name is Miranda Chook, a CPA. This is a brief introduction to the cash flow statement. Now as its name suggests, this statement shows the uses as well as the sources of cash. There are two methods for preparing the cash flow statement. One is the direct method and one is the indirect method. The indirect method is the one that is used by most companies and you really don't need to worry about which one; which method would you use in the cash flow statement that you're reading; but it just helps a little bit to know where you're starting point is. So again, you'll most likely be looking at an cash flow statement prepared using the indirect method of cash flows which means that you'll start with the net income figure. And this first section shows the uses and sources of cash from operating activities. So you start with net income and what the company will do is add in non cash type of expenses and subtract non cash gains from the net income number. And then, it will show changes and may enter balance sheet account as well to get to the net cash used or net cash provided by operating activities. The next major section of the cash flow statement is the cash used or provided by investing activities. Companies may invest their excess funds and different types of securities so that what you'll see in this section. You'll also see investments and fix assets in this section. The third major section of the cash flow statement is the cash used or provided by financing activities. Here you'll see whether a company has receive proceeds from issuances of common stock or issuances of stock in relation to stock option plans. And you'll also see there are other types of financing that has been entered into in this section. Then when you add and subtract all of these subtotals together, you'll get the net cash that has been used or provided by the company for that period. You then add that number to cash at the beginning of the period to arrive at cash at the end of the period and this will be the same number as cash on the balance sheet. So now you can see how one number on the balance sheet has all these detail that's contained in a, a whole another financial statement. There are also some common disclosures that you'll see in a cash flow statement as well if they're applicable to the company."