Page 115 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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report. If we were to prepare a longer form of this report, we
might expand it to show both sides of these transactions on sep-
arate lines, thus providing additional information to readers.
Net Reduction in Long-Term Debt
This item is not unlike the bank loans items in the way it flows
through the report. Additional borrowings increase cash; repay-
ments reduce cash. The separate classification and different
labels simply reflect the fact that long-term debt is shown on a
different line on the balance sheet, so it is typically shown on a
separate line in the statement of cash flow, to help the reader
associate the two statements when reading the company’s finan-
cial report. In this particular month, the company made a
$1,000 payment on its long-term debt and did not borrow any
more money in this category, so the net change is a reduction of
$1,000. We can’t be perfectly certain of this from the short for-
mat in our example, but logic tells us that a net change in cash
of so small an amount was unlikely to include anything other
than a monthly payment. A quick look at the balance sheets for
this month and the month before (March 2003 in our example)
would confirm our notion that no new debt was incurred.
Dividends Paid to Stockholders
A profitable company will often elect to pay a distribution of
profits to its owners. A corporation will make that distribution in
the form of a dividend on the shares of stock held by its stock-
holders, as in our example. Since such distributions are almost
always in cash and they are not expenses that would appear on
the income statement, this is the only place such payments
may appear.

Net Cash Flow (Drain)
This is the sum of all the entries preceding it. It should always
be equal to the actual change in cash balances from the begin-
ning to the end of the period of the report. That’s why the final
step in this statement is to add to this line the beginning bal-