Page 106 - Finance for Non-Financial Managers

Siciliano06.qxd 2/8/2003 7:05 AM Page 87
The Cash Flow Statement: Tracking the King
Direct method of presenting cash flows from operat-
ing activities Shows each major class of gross cash receipts
and gross cash payments, summarizing cash outflows and 87
inflows.This method may be easier for people without accounting train-
ing to read. However, it’s not considered to have much analysis value.
Indirect method of presenting cash flows from operating
activities Begins with net income and adjusts for changes in account
balances that affect available cash.This method requires some practice
to learn to read it, but it’s much preferred by experts because of the
wealth of information it contains.
Let’s look at the statement of cash flow from The Wonder
Widget Company (Figure 6-2). Notice that the first entry on the
page is Net Income, giving us a clue that this statement will
pick up where the income statement left off. The idea is that net
income is presumed to be equal to net cash flow, except for the
adjustments that make up the details of this statement. Notice
also that the entries on the page are divided into three sec-
tions—Operations, Investing, and Financing. These are the three
principal areas of activity for most companies.
Let’s explore the activities of Wonder Widget for June 2003
and see what we can learn from its cash flow reporting. We’ve
slipped in a couple of transactions that our early stage company
might not be able to pull off just yet, like long-term borrowing,
but this gives us more opportunity to explain the kinds of
entries we might see on a more fully developed company’s
report. We’ve also added a few words of commentary to each
line on the report, to help you understand the nature of the
transactions that created the need for the adjustment; we’ll
comment on those further in the respective sections that follow.

Cash from Operations—Running the Business

Operations is the process of running the company, with all the
related cash flows, such as buying and selling goods and servic-
es, manufacturing, paying employees, etc. In the simplest of sit-
uations, involving only the day-to-day operation of the compa-