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In order to refer to this, we need to mention that the cash flow statement for the year generally reflects three different cash flow positions or categories: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. I have discussed the interrelationship between the cash flow from operating activities and the balance sheet. The other two categories are also reflected in the balance sheet.
Indeed, the company may invest during the financial year in fixed assets, such as property or equipment. The negative difference reflected on the statement of cash flows will be noted as an increase in the total asset value on the balance sheet, that is, an increase in the value for "property, plant and equipment."
This is the same for the cash flows from financing activities, which are strictly connected to the "liabilities and owners' equity" fields on the balance sheet. The financing activities refer to such things as borrowing or stock issues during the financial year. The "long-term debt borrowing" value will be noted as an increase in the "long-term notes payable" value on the balance sheet.
As a general conclusion here, we may assert that the balance sheet is generally the statement where the other three statements, with an accent on the income statement and the statement of cash flows, find their values recorded. In this sense, we may assert that the income statement and the statement of cash flows form separate and more comprehensive explanations of several positions in the balance sheet.
In my opinion, this is not the only way that the interrelationship between the four basic financial statements can be demonstrated. Managers often use comparative tools and forms of analysis, because the figures in the balance sheet or the cash flow statement will not tell you much if they are not included into a more detailed analysis. This is where the financial ratios fit in the picture.
The financial ratios use values from the four basic financial statements in order to give out evaluations on the company's profitability or liquidity. There are generally six types of major financial ratios: liquidity ratios, debt management ratios, asset management ratios, profitability ratios, growth ratios and market value ratios.
The reason I have mentioned the financial ratios is that many of them are calculated by using elements from different financial statements.
Let's take, for example, one of the asset management ratios. The inventory turnover is calculated as the net revenues from sales divided by the inventory value. One of the elements, the net revenue from sales (net sales) is taken from the income statement, while the other, the inventory value, can be found on the balance sheet. Some of the profitability values have the same properties (the return on total assets- ROA or the return on equity- ROE indicators).
Resuming what I have argued for previously, there are two major arguments that demonstrate the interrelationship between the four basic financial statements. First of all, many of the values that are reflected in one statement generally find themselves in another. Even more so, there is a flow of information from one financial statement to another. As we have seen in the examples above, data from the cash flow statement is recorded on the statement of stockholders' equity or on the balance sheet.
Additionally, the financial ratios that we use to evaluate the company's overall financial situation are calculated based on information coming from all four financial statements. Many of these ratios are a combination of data from two separate statements.
1. Halpern, Paul; Weston, Fred; Brigham, Eugene. Canadian Managerial Finance. Dryden, Fourth Edition. 1994
4. Business Owner's Toolkit. On the Internet at http://www.toolkit.cch.com/text/P06_7040.asp
Halpern, Paul; Weston, Fred; Brigham, Eugene. Canadian Managerial Finance. Dryden, Fourth Edition. 1994. Also on the Internet at www.apec.umn.edu/faculty/gpederso/PPTLectures/Lecture_2.ppt
On the Internet at http://www.investorwords.com/769/cash_flow_statement.html
Business Owner's Toolkit. On the Internet at http://www.toolkit.cch.com/text/P06_7040.asp
Halpern, Paul; Weston, Fred; Brigham, Eugene. Canadian Managerial Finance. Dryden, Fourth Edition. 1994 (Page 102)[continue]
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