Cash Flow Analysis
15.511 Corporate Accounting
Summer 2004
Professor SP Kothari
Sloan School of Management
Massachusetts Institute of Technology
June 16, 2004
1
,Statement of Cash Flows
z Reports operating cash flow as well as
other cash flow information.
z Provides important information to investors
and creditors.
z In particular, information about
differences in the timing of revenue and
expense recognition under GAAP and the
associated cash inflows and outflows.
2
,Statement of Cash Flows
z The cash flow statement separates changes in
cash into three categories:
z operating cash flow
z investing cash flow
z financing cash flow.
z The statement sums to the actual change in
cash during the year
z The actual change refers to the difference between the
beginning and ending cash balances reported on the
balance sheet.
3
, Why focus on a cash flow statement?
z Net income reported on the income statement provides an
important measure of performance.
z However, in the absence of cash flow, income does not pay
the bills.
z Interest and dividend payments, required principal reductions
on debt, and capital expenditures for plant and equipment
and for expansion cannot be made without cash.
z Cash provided by operating activities, also known as
operating cash flow, is a primary source of cash to meet
these needs.
4
15.511 Corporate Accounting
Summer 2004
Professor SP Kothari
Sloan School of Management
Massachusetts Institute of Technology
June 16, 2004
1
,Statement of Cash Flows
z Reports operating cash flow as well as
other cash flow information.
z Provides important information to investors
and creditors.
z In particular, information about
differences in the timing of revenue and
expense recognition under GAAP and the
associated cash inflows and outflows.
2
,Statement of Cash Flows
z The cash flow statement separates changes in
cash into three categories:
z operating cash flow
z investing cash flow
z financing cash flow.
z The statement sums to the actual change in
cash during the year
z The actual change refers to the difference between the
beginning and ending cash balances reported on the
balance sheet.
3
, Why focus on a cash flow statement?
z Net income reported on the income statement provides an
important measure of performance.
z However, in the absence of cash flow, income does not pay
the bills.
z Interest and dividend payments, required principal reductions
on debt, and capital expenditures for plant and equipment
and for expansion cannot be made without cash.
z Cash provided by operating activities, also known as
operating cash flow, is a primary source of cash to meet
these needs.
4
