Cash Flow Statements are not as strait forward as an income statement or balance sheet. When you look at a statement you must remember that you are adding back expenses and subtracting assets to come to the total change in cash at the end of the quarter. At the top you see AAPL’s cash flow statement example. Here we go with how to read a cash flow statement!
How to read a cash flow statement: Cash and equivalent
We will start at the top with the cash and cash equivalent, beginning balance. You get this number from the balance sheet by adding together the cash and cash equivalents lines. It consists of the cash and short-term investments such as bank and money market accounts. This is the number that begins every cash flow statement. Every other line will be either adding items back or subtracting from the total cash available.
When we move to the next line, we get to net income. Net income comes from the P&L statement (If you need a description of the P&L statement you can click HERE). Net income gets added directly to the cash because it is income attributed to the business.
How to read a cash flow statement: Depreciation
Depreciation and amortization are what are called non-cash expenses. Over time buildings and equipment lose value this is what is known as depreciation and amortization. Companies use this line on the cash flow statement to add these expenses back. While they are expenses, they are not a cash expense. The buildings and equipment lose value, but the company does not have to pay out money for his expense because the buildings have been paid either through cash or debt. Therefore, you add the expense back into the cash account.
Share based Compensation
Share based compensation is stock issued to executives of the company as opposed to a cash compensation. This is included in the executive’s compensation as an expense but, again, it is a non-cash expense, so it is added back in to the cash account. On the cash flow statement.
Deferred Income tax is part of the tax provision from the P&L statement. Deferred tax payments will be paid later so they get added back into the cash account.
Other is smaller non-cash income or expenses that get added back to the cash account. In this case the other expenses are negative, meaning they spent cash, so it will reduce the total cash available on the cash flow statement.
How to read a cash flow statement: Income and Asset
Here we come to the end of part one of a cash flow statement. This next section are items that have been recorded as income or assets but do not change the cash account, so they are subtracted from the cash account. They are also known as non-cash income.
Accounts receivable are sales that have been made but payment for the sales are typically remitted within 30 or 60 days. Since the money has not been paid the cash has not been received. The income gets subtracted from the cash account.
Inventories are the products that company owns and is related to the change in inventory on the balance sheet. It looks as though Apple reduced its inventory in the quarter. Since the inventory line is negative the net will be an increase in the cash account. Think of it this way, Apple sold more Iphones than they bought so they have the cash left over from the extra sales.
Non-trade receivables on the Cash Flow Statement
Vendor non-trade receivables are the receivable that are not included in accounts receivable and are treated just the same way. The cash has not been received to you need to subtract the receivables from cash.
Other current and non-current assets will get added back in since they are negative. It looks like they had some depreciation on current assets.
Accounts payable are the money owed to other businesses that has not been paid. Since the money has not been paid it gets added not the cash account. It appears that Apple has a credit with its suppliers since the balance is negative the accounts payable will increase the amount of cash.
Deferred revenue is another way to say money owed to the company. It looks like Apple has received excess revenue since the total deferred revenue is negative. This number will increase the amount of cash on the balance sheet.
Cash generated by operating activities is the net of all the lines before above.
That is all for today, take a break and see you tomorrow with Part 2 Read more on Balance Sheets.
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