FINANCIAL
STATEMENT ANALYSIS 1-23
Now, let's see how we build the Cash Flow Statement. It is grouped into
two main sections:
·
Funds generated and used by operating activities
·
Funds generated by financing activities
Operating Activities
We begin by identifying the operating activities that contribute to the
company's cash flow. Then we classify each activity as a source or a
use of cash.
Sources
Balance Sheet:
increased
liabilities;
decreased assets
First, let's see which accounts in the Balance Sheet represent sources
of cash from operating activities. There are two general rules to
determine if a change in a Balance Sheet account is a source of cash:
1. An increase in a liability or equity account is a source
of cash.
For example, an increase in
A
CCOUNTS
P
AYABLE
(from $20.2
million in 1992 to $22.7 million in 1993) indicates that in 1993,
XYZ Company borrowed $2.5 million more from creditors than
it paid off. The company had access to that $2.5 million for use
in the business.
2. A decrease in an asset account is a source of cash.
For example, the decrease in the
I
NVENTORY
account (from $92.4
million in 1992 to $88.7 million in 1993) indicates that XYZ
Corporation reduced its investment in inventories by $3.7
million over the period. XYZ then had $3.7 million to use in
some other part of the company's operations.