Introduction The cash flow statement is the third major financial statement that is mandated by the Securities Exchange Commission. Every public company must produce a statement of cash flows that highlights the acquisition and disposition of cash, for operations, investment and finance. The cash flow statement can lend context to the income statement and balance sheet both, which makes it a valuable statement to examine. One key difference between the cash flow statement and the other two is that there are not many ratios with which to perform analysis. Analyzing the cash flow statement is a little bit more intuitive.

As with the other statements, the cash flow statement is produced to help provide transparency to an organization’s stakeholders, and assist with evaluating the financial condition of the company. There are key financial stakeholders such as the shareholders and the creditors, but many other stakeholders as well such as customers, employees and management, competitors and potential investors as well as regulators.

Three Parts of the Cash Flow Statement

The cash flow statement breaks down a company into three types of activities. The operating activities are just that – the operations of the company. This section of the cash flow statement can provide important context to the income statement in particular. For example, the income statement can show that the company is turning a profit, but some of that profit (or loss) can be non-cash items. The operating cash flows breakdown can help because it removes the non-cash items from the income statement. Thus, expenses such as depreciation are removed, as well as non-cash writedowns that might occur. There are many instances where a company’s net income can vary considerably from year to year but the operating cash flows do not. In such a situation, the company’s operations haven’t changed much and the net income swings are due to non-cash items.

The second part of the cash flow statement is the cash from investing activities. Companies can invest not only in securities but in building out infrastructure. Investing activities will typically reflect these flows....

In many cases, the cash flow will occur in one year, but the investment might be amortized or depreciated on the income statement over the course of many years. But spending a lot of money today in order to earn profit tomorrow is still spending cash, and stakeholders still need to understand the cash position of the company, so it is valuable to break out these particular flows.
The third part of the cash flow statement is the cash flow from financing activiites. Financing activities are the acquisition and disposition of debt, issuing equity, paying dividends and buying back stock. Often, one will see a large acquisition of debt in this section, to go along with a large investment in something in the investing activities section. One of the interesting aspects of this part of the cash flow statement is the stock buyback line item. Sometimes, a company’s share price goes up even when its financial performance is not great, and that can occur if it buys back enough of its own shares, which creates demand. This can be quite valuable for investors to understand – why the stock price is going up, and that it is not actually related to the company’s performance.

Taken together, these three sections provide a substantial amount of information relating to the company’s cash flow. An analyst can work through the cash flow statement, using it to provide context to the other financial statements, but also to examine issues such as solvency and liquidity, and evaluating the operations of the company as well.

Analysis of Ford Motor Company Cash Flow Statement

The income statement for Ford showed substantial variation in net income for the 2010-2012 period, which means that there is some value in analyzing the cash flows from operations, which is a better signal of operational success than the income statement in years when there is substantial fluctuation in non-cash items. Unfortunately, the cash flow statement in Ford’s 2012 Annual Report is a disappointment in this regard.

There is a line item for cash from operations, but there is no breakdown, so no context provided. The line item shows that cash from operations…