Analysis of Cash Flow Statement

Alpha Company
Year-1989
1

For each of the years on the Statement of Cash Flows:

1. What was the firms major sources of cash? Its major use of cash?
Major sources of cash are proceeds from long-term debt and short
term borrowings. Major uses of cash would be investment in
depreciable assets and payments of long-term debt
2. Was cash flow from operations greater than or less than net income?
Explain in detail the major reasons for the difference between these two
figures
Cash from operations is greater than that from net income. The increase
in net operating cash can be accounted to:

Depreciation:- The value is subtracted in net income, but not

from cash as it does not result in any cash

Restructuring and other unusual item:- This reduces the net

income, however it doesnt affect the net cash

3. Was the firm able to generate enough cash from operations to pay for all
capital expenditures?
The firm was not able to generate enough cash from operations to fund
its capital expenditures
4. Did the cash flow from operations cover both the capital expenditures
and firms dividend payment, if any?
The firm was not able to generate enough cash from operations to
fund its capital expenditures and dividend payments
5. If it did, how did the firm invest its excess cash?
6. If not, what were the sources of cash the firm used to pay for the capital
expenditures and/or dividends?
Sources of cash used to pay for capital expenditures and/or dividends
are proceeds from long-term debt and short term borrowings.
7. Were the working capital (current asset and current liability) accounts
other than cash and cash equivalents primarily sources of cash, or users
of cash?
Net working capital account is primarily a source of cash.

8. What other items affected cash flow?

The purchase of treasury stocks and effect of changes in foreign
exchange are other users of cash.

Year-1990
I

For each of the years on the Statement of Cash Flows:

1. What were the firms major sources of cash? Its major use of cash?
Major sources of cash are sale of discontinued operations and
disposal of depreciable and other assets.Major uses of cash would
be payments of long-term debt and short-term borrowings
2. Was cash flow from operations greater than or less than net income?
Explain in detail the major reasons for the difference between these two
figures
Cash from operations is greater than that from net income. The increase
in net operating cash can be accounted to:

Depreciation:- The value is subtracted in net income, but not

from cash as it does not result in any cash

Inventory:- The adjustment of inventory also increases the net

cash from operations in comparison to net income. This increase
is because of sales of inventory which was created before the
current period.

Accounts Receivable:- The adjustment of accounts receivable also

increases the net cash from operations in comparison to net
income. This increase is because of payments of accounts
receivable existing towards that in opening balance.

Restructuring and other unusual item:- This reduces the net

income, however it doesnt affect the net cash

3. Was the firm able to generate enough cash from operations to pay for all
capital expenditures?
The firm was not able to generate enough cash from operations to fund
its capital expenditures
4. Did the cash flow from operations cover both the capital expenditures
and firms dividend payment, if any?
The firm was not able to generate enough cash from operations to
fund its capital expenditures and dividend payments

5. If it did, how did the firm invest its excess cash?

6. If not, what were the sources of cash the firm used to pay for the capital
expenditures and/or dividends?
Sources of cash used to pay for capital expenditures and/or dividends
are proceeds from long-term debt and that of sales of depreciable
assets and discontinued operations
7. Were the working capital (current asset and current liability) accounts
other than cash and cash equivalents primarily sources of cash, or users
of cash?
Net working capital account is primarily an user of cash.
8. What other items affected cash flow?
The purchase of treasury stocks and effect of changes in foreign
exchange are other users of cash.

Year-1991
I

For each of the years on the Statement of Cash Flows:

1. What was the firms major sources of cash? Its major use of cash?
Major sources of cash are proceeds from disposal of depreciable
and other assets and cash from operating expenses. Major uses of
cash would be payments of long-term debt and investment in
depreciable assets.
2. Was cash flow from operations greater than or less than net income?
Explain in detail the major reasons for the difference between these two
figures
Cash from operations is greater than that from net income. The increase
in net operating cash can be accounted to:

Depreciation:- The value is subtracted in net income, but not

from cash as it does not result in any cash

Inventory:- The adjustment of inventory also increases the net

cash from operations in comparison to net income. This increase
is because of sales of inventory which was created before the
current period.

Accounts Receivable:- The adjustment of accounts receivable also

increases the net cash from operations in comparison to net
income. This increase is because of payments of accounts
receivable existing towards that in opening balance.

Restructuring and other unusual item:- This reduces the net

income, however it doesnt affect the net cash

3. Was the firm able to generate enough cash from operations to pay for all
capital expenditures?
The firm was not able to generate enough cash from operations to fund
its capital expenditures
4. Did the cash flow from operations cover both the capital expenditures
and firms dividend payment, if any?
The firm was not able to generate enough cash from operations to
fund its capital expenditures and dividend payments
5. If it did, how did the firm invest its excess cash?
6. If not, what were the sources of cash the firm used to pay for the capital
expenditures and/or dividends?
Sources of cash used to pay for capital expenditures and/or dividends
are proceeds from long-term debt and that of sales of depreciable
assets and discontinued operations
7. Were the working capital (current asset and current liability) accounts
other than cash and cash equivalents primarily sources of cash, or users
of cash?
Net working capital account is primarily a source of cash.
8. What other items affected cash flow?
The purchase of treasury stocks and effect of changes in foreign
exchange are other users of cash.

Trends
1. Net income
We can see that the net income is showing an increasing trend after the
dip in the previous year.
2. Cash Flow from (continuing) operation
The cash flow from operations is continuously increasing from 19891991
3. Capital Expenditure
The capital expenditure of the company is decreasing from 19891991

4. Dividend
The dividend has been decreasing continuously for the previous three
years.
5. Net Borrowing
The net borrowing of the company is increasing from a dip in the
previous year.
6. Working Capital Account
The working capital of the company is showing a increasing trend after
the dip in the previous year.

III
As we can see from the statement of cash flows, the net income is
increasing every year. Also, the cash flow from operating activities is
increasing. The capital expenditure of the company is decreasing which
means the company is becoming more stable. Also, the working capital
of the company is increasing. Though the net borrowing of the company
has increased, since net cash flow has increased the overall picture of
the company seems to be healthy.

Exhibit 1-Beta Corporation

Year-1989
1

For each of the years on the Statement of Cash Flows:

1

What was the firms major sources of cash? Its major use of cash?
The major source of cash is Proceeds of subordinated debts and
Cash from operating activities.
The major use of cash is towards Capital Expenditure

2. Was cash flow from operations greater than or less than net income?
Explain in detail the major reason for difference between these two
figures?
Cash flow from operations was greater than that from net income. This is
because a major chunk of the increase in net income can be attributed
to:

Depreciation and amortization: This value is deducted from net

income, but not from net cash as it does not result in any cash
flow.

Decrease in Inventory: The decrease in inventory is not marked in

net income as this value was already accounted in a previous
financial year. But the cash arising out of this transaction was
realized only in this financial year. Hence, it results in an increase
in net cash.

Similarly, a payment towards accounts payable and accrued

expenses for a previous year results in an increase in net cash,
but does not change the net income.

3. Was the firm able to generate enough cash from operations to pay for all
capital expenditures?
Since the net cash from operating activities accounted to $3670 mn
while the capital expenditure was $3650 mn. , the cash from operating
income was sufficient to fund the capital expenditure.

4. Did the cash flow from operations cover both the capital expenditures
and firms dividend payment, if any?
Yes, the cash flow from operations cover both capital expenditures and
firms dividend payments.
5. If it did, how did the firm invest its excess cash?
The excess cash can be used for payments towards working line,
equipment line or capital lease obligations.
6. If not, what were the sources of cash the firm used to pay for the capital
expenditures and/or dividends?
7. Were the working capital (current assets and current liability) accounts
other than cash and cash equivalents primarily sources of cash, or users
of cash?
The working capital accounts other than that of cash and cash
equivalents are primarily
users of cash.

8. What other major items affected cash flow?

The other major sources of cash were proceeds from issuance of
common stock. Similarly, the other major users of cash were net
payments towards working capital line and equipment line of credit.
Similarly, payments towards capital lease obligations is also an user of
cash.
Year-1990
I For each of the years on the Statement of Cash Flows:
1. What was the firms major sources of cash? Its major use of cash?
The major source of cash is Cash from operating activities.
The major use of cash is towards Capital Expenditure
2. Was cash flow from operations greater than or less than net income?
Explain in detail the major reason for difference between these two figures?
Cash flow from operations was greater than that from net income. This is
because a major chunk of the increase in net income can be attributed
to:

Depreciation and amortization: This value is deducted from net

income, but not from net cash as it does not result in any cash
flow.

3. Was the firm able to generate enough cash from operations to pay for all
capital expenditures?
Since the net cash from operating activities accounted to $7000 mn
while the capital expenditure was $4600 mn. , the cash from operating
income was sufficient to fund the capital expenditure.

4. Did the cash flow from operations cover both the capital expenditures and
firms dividend payment, if any?
Yes, the cash flow from operations cover both capital expenditures and
firms dividend payments.
5. If it did, how did the firm invest in excess cash?
The excess cash can be used for payments towards working line,
equipment line or capital lease obligations. In fact the excess cash is
sufficient for payment towards all these financing activities.
6. If not, what were the sources of cash the firm used to pay for the capital
expenditures and/or dividends?

7. Were the working capital (current assets and current liability) accounts
other than cash and cash equivalents primarily sources of cash, or users of
cash?
The working capital accounts other than that of cash and cash
equivalents are primarily
users of cash.
8. What other major items affected cash flow?
The other major sources of cash were proceeds from issuance of
common stock. Similarly, the other major users of cash were net
payments towards working capital line and equipment line of credit.
Similarly, payments towards capital lease obligations is also an user of
cash.

Year-1991
I For each of the years on the Statement of Cash Flows:
1. What was the firms major sources of cash? Its major use of cash?
The major source of cash is Proceeds from the issuance of common
stock.
The major use of cash is towards purchases for marketable
securities and capital expenditures.
2. Was cash flow from operations greater than or less than net income?
Explain in detail the major reason for difference between these two figures?
Cash flow from operations was less than that from net income. The
major reason for the difference between net income and net cash can be
attributed to:

Depreciation and amortization: This value is deducted from net

income, but not from net cash as it does not result in any cash
flow.

Increase in accounts receivable: As a major part of the net

income is realized as accounts receivable, the net income
increases, but cash flow does not change.

3. Was the firm able to generate enough cash from operations to pay for all
capital expenditures?

Since the net cash from operating activities accounted to $3919 mn

while the capital expenditure was $6031 mn. , the cash from operating
income was insufficient to fund the capital expenditure.

4. Did the cash flow from operations cover both the capital expenditures and
firms dividend payment, if any?
No, the cash flow from operations was insufficient to cover capital
expenditures and firms dividend payments.
5. If it did, how did the firm invest in excess cash?
6. If not, what were the sources of cash the firm used to pay for the capital
expenditures and/or dividends?
The capital expenditures were funded from proceeds of issuances of
common stock.
7. Were the working capital (current assets and current liability) accounts
other than cash and cash equivalents primarily sources of cash, or users of
cash?
The working capital accounts other than that of cash and cash
equivalents are primarily
users of cash.
8. What other major items affected cash flow?
The other major sources of cash were proceeds from issuance of
common stock. Similarly, the other major users of cash was payments
towards capital lease obligations. Similarly, net payments towards
working capital line and equipment line of credit is also an user of cash.

II

What was the trend in:

9. Net income
The net income is showing a consistent increasing trend as the income is
increasing from 1989 to 1991 (from $417 to $6323).
10.Cash Flow from (continuing) operations
The cash flow from operations is showing a decreasing trend after an
increasing trend in the previous year(1990)
11.Capital Expenditures

The capital expenditure of the firm is increasing which indicates that the
firm is increasing more funds to the purchase of fixed-assets
12.Dividends
As the company has not provided any dividends till now, it is not
possible to assess the trend for dividends
13.Net Borrowings
The net borrowings is showing an increasing trend after a dip in the
previous year
14.Working Capital Accounts
The working capital of the company is showing a consistent increasing
trend.
III Based on the evidence of Statement of Cash Flows, what is your assessment of
the financial strength of the business? Why?
The net income of the business is increasing and this shows that the firm
is increasing its foothold in the business. The cash flow from operating expenses
is showing a decrease in comparison to the previous year. However, the cash
received from customers is showing a consistent increase. The decrease in cash
flow from operations can be mainly attributed to higher income tax and cash paid
to suppliers and employees. Since, this increase can lead to higher source of
revenue in future the decrease in cash flow from operations is not worrisome.
The capital expenditures of the company is also increasing. This shows
that the company is investing heavily in fixed assets which will lead to an increase
in production capacity. As for net borrowings it has shown a huge increase over
the previous years and this increase is mainly funded by issuance of new stocks.
As far as whether the source of funding is sustainable depends on the future net
income and dividends paid by the company. The working capital of the company
is showing an increasing trend. This is a healthy sign as the excess cash with a
company would increase as the working capital increases.
Thus based on the evidence of statement of cash flows, the outlook of the
company seems healthy.

Gamma Company
Year-1989
I For each of the years on the Statement of Cash Flows:
1. What was the firms major sources of cash? Its major use of cash?

Major Sources of Cash- Cash from Operating Activities, Proceeds from Issuance
of debts and issuance of treasury shares, including tax benefits
Major Uses of Cash- Purchase of plant, property, and equipment, Increase in other
assets, Payments to retire debt and Purchase of treasury shares
2. Was cash flow from operations greater than or less than net income?
Explain in detail the major reason for difference between these two
figures?

Cash flow from operations was greater than that from net income. The
major reason for the difference between net income and net cash can be
attributed to:

Depreciation and amortization: This value is deducted from net

income, but not from net cash as it does not result in any cash
flow.

Increase in Deferred Revenue and customer advances

3. Was the firm able to generate enough cash from operations to pay for all
capital expenditures?
The cash from operating income was sufficient to fund the capital
expenditure.
4. Did the cash flow from operations cover both the capital expenditures
and firms dividend payment, if any
The cash from operating income was sufficient to fund the capital
expenditure and dividend payments.
5. If it did, how did the firm invest in excess cash?
The excess cash could be used for funding a portion of payments of
increase of other assets, Payments to retire debt or Purchase of treasury
shares.
6. If not, what were the sources of cash the firm used to pay for the capital
expenditures and/or dividends?
7. Were the working capital (current assets and current liability) accounts
other than cash and cash equivalents primarily sources of cash, or users
of cash?
The working capital was primarily users of cash
8. What other major items affected cash flow?

The other major items affecting cash flow are: proceeds from issuance of
debt, purchase of treasury shares and issuance of treasury shares.

Year-1990
I For each of the years on the Statement of Cash Flows:
1. What was the firms major sources of cash? Its major use of cash?
Major Sources of Cash- Cash from Operating Activities, Proceeds from Issuance
of debts and issuance of treasury shares, including tax benefits
Major Uses of Cash- Purchase of plant, property, and equipment, Increase in other
assets, Payments to retire debt and Purchase of treasury shares
2. Was cash flow from operations greater than or less than net income?
Explain in detail the major reason for difference between these two
figures?
Cash flow from operations was greater than that from net income. The
major reason for the difference between net income and net cash can be
attributed to:

Depreciation and amortization: This value is deducted from net

income, but not from net cash as it does not result in any cash
flow.

Increase in Deferred Revenue and customer advances

Increase in restructuring reserve

Increase in other liabilities

3. Was the firm able to generate enough cash from operations to pay for all
capital expenditures?
The cash from operating income was sufficient to fund the capital
expenditure.
4. Did the cash flow from operations cover both the capital expenditures
and firms dividend payment, if any
The cash from operating income was sufficient to fund the capital
expenditure and dividend payments.
5. If it did, how did the firm invest in excess cash?
The excess cash could be used for funding a portion of payments of
increase of other assets, Payments to retire debt or Purchase of treasury
shares.

6. If not, what were the sources of cash the firm used to pay for the capital
expenditures and/or dividends?
7. Were the working capital (current assets and current liability) accounts
other than cash and cash equivalents primarily sources of cash, or users
of cash?
The working capital was primarily users of cash
8. What other major items affected cash flow?
The other major items affecting cash flow are: proceeds from issuance of
debt, purchase of treasury shares and issuance of treasury shares and
increase in restructuring reserve.
Year-1991
I For each of the years on the Statement of Cash Flows:
7. What was the firms major sources of cash? Its major use of cash?
Major Sources of Cash- Cash from Operating Activities, Proceeds from Issuance
of debts and issuance of treasury shares, including tax benefits
Major Uses of Cash- Purchase of plant, property, and equipment, Increase in other
assets, Purchase of Kienzle business Payments to retire debt and Purchase of
treasury shares
8. Was cash flow from operations greater than or less than net income?
Explain in detail the major reason for difference between these two
figures?
Cash flow from operations was greater than that from net income. The
major reason for the difference between net income and net cash can be
attributed to:

Depreciation and amortization: This value is deducted from net

income, but not from net cash as it does not result in any cash
flow.

Increase in Deferred Revenue and customer advances

Increase in restructuring reserve

Increase in other liabilities

9. Was the firm able to generate enough cash from operations to pay for all
capital expenditures?
The cash from operating income was sufficient to fund the capital
expenditure.

10.Did the cash flow from operations cover both the capital expenditures
and firms dividend payment, if any
The cash from operating income was sufficient to fund the capital
expenditure and dividend payments.
11.If it did, how did the firm invest in excess cash?
The excess cash could be used for funding a portion of payments of
increase of other assets, purchase of Kienzle business, Payments to
retire debt or Purchase of treasury shares.
12.If not, what were the sources of cash the firm used to pay for the capital
expenditures and/or dividends?
13.Were the working capital (current assets and current liability) accounts
other than cash and cash equivalents primarily sources of cash, or users
of cash?
The working capital was primarily a source of cash
14.What other major items affected cash flow?
The other major items affecting cash flow are: proceeds from issuance of
debt,purchase of Kienzle business, purchase of treasury shares and
issuance of treasury shares and increase in restructuring reserve.

II Trends
15.Net income
We can see that the net income is continuously decreasing from 19891991( from $1479391 to $1040901)
16.Cash Flow from (continuing) operation
The cash flow from operations is continuously decreasing from 19891991
17.Capital Expenditure
The capital expenditure of the company is increasing
18.Dividend
No dividend has been provided till now.
19.Net Borrowing
The net borrowing of the company is increasing from a dip in the
previous year.

20.Working Capital Account

The working capital of the company is showing a decreasing trend.

III
As we can see from the statement of cash flows, the net income is
decreasing every year. Also, the cash flow from operating activities is
decreasing. This is a major cause of concern. The capital expenditure of
the company is also increasing and this is mainly funded by borrowings.(
net borrowing is increasing). Also, the working capital of the company is
decreasing. This means that the company is going through a negative
cycle as most of the indicators have a negative trend. Hence, the
company needs to take stock of things and must have a clear plan in
future.