Introduction
A statement of cash flow is a tool that financial analysts use to measure the economic resources an organization. It helps determine the amount raised and how much it used during a particular fiscal period. Although cash flow statement may be inferior to the income statement and balance sheet, it is crucial in explaining specific trends of the company’s performance. The patterns may not be tabulated or elaborated in the income statement and balance sheet. However, both the income statement and the balance sheet build up the elements of a cash flow statement.
For proper communication of a company’s financial position to stakeholders and investors, the cash flow statement has three main categories:
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Operating Activities
This category of cash flow statement involves revenue generating activities and operating expenses of a company. Examples include; sales proceeds from company products or services, salaries and wages, transport costs and rent. These activities constitute a company’s core business. Activities that bring income into the company affect the net income when the agreement is laid down. However, they affect cash flow statement only at the time of payment.
Investing Activities
Cash proceeds from the sale of long-term assets or cash paid for the purchase of long-term assets form the investing activities in a company’s cash flow statement. Property (computers, printers land, and buildings), plant and equipment, debt and equity instruments of other companies and acquisition of other businesses are examples of investing activities ( Corporate Finance Institute, 2018). They are vital in the company’s continued operations. Increase in investment activities appears with a negative sign on the statement. It indicates the movement of cash outside the organization.
Financing Activities
These are activities which change a company’s ownership interest. The sale or re-purchase of company shares, issuance or repayment of debt, and issuance of equity are examples of cash flow statement entries by financing activities ( Corporate Finance Institute, 2018). A company with the intention to increase its cash reserves may issue a debt. Liquid cash helps the company expand its operations. Paying back debts or repurchasing shares gives existing equity holders more stake.
Ford Motor Company Cash Flow Statement Analysis
Cash Flows from Operating Activities
Net income from operations showed a declining trend in three years. The reason could be due to a reduction in income generating activities or an increase in operating expenses. In 2011 and 2012, the automobile company increased their debtors by $1,534. This increase implies that some of their goods sold on credit and, the company was yet to receive payments. The company’s revenue dwindled by $2012 in two years (Ford Motor Company, 2018). Income is dependent on sales. Low sales volume or competition may have set in.
Cash Flows from Investing Activities
Ford Motors Company experienced increased investment activities in 2012. A total of $11,249 went into investment activities between 2011 and 2012 bringing the total cash outflow to $14,290. Although the company sold securities worth $ 93,749, it is likely that it plowed back the money into the purchase of more securities. The total cash outflows into securities were $95,135 (Ford Motor Company, 2018). The cash inflows from investing activities in 2012 which included proceeds from the sale of business were insignificant.
Cash Flows from Financing Activities
The total net cash flow from investing activities for Ford Motors increased by $7,946 in 2012. There was a significant improvement on the company’s cash outflows. In the year 2010, the company had a massive debt burden that went on declining to the year 2012. The most prominent contributor to this change was the reduction in the principal payments on other debts. The company saved $13,885 on debt payments (Ford Motor Company, 2018). There was also a cash inflow from the issuance of additional liabilities by the company. However, unlike before, Ford Motor Company paid cash dividends and purchased common stock. These activities amounted to $888 outflow.
Conclusion
From the consolidated financial report of Ford Motors, it is apparent that the company experienced a reduction in its total cash and cash equivalents. It redirected most of its financial resources towards investment activities. It is critical for businesses to have enhanced liquidity at all times. For increased cash flow, the company should put payment policies in place and support by collection follow up. A company that has identified its financial needs will always have alternative sources of financing if the internal avenues are insufficient (Wiley, 2018).
References
Ford Motor Company. (2018). Ford Motor Company 2012 Annual Report. Retrieved from http://corporate.ford.com/content/dam/corporate/en/investors/reports-and- filings/Annual%20Reports/2012-annual-report.pdf
Wiley, C. (2018). Difference Between Income and Cash Flow . Retrieved from http://smallbusiness.chron.com/difference-between-income-cash-flows-22901.html
Corporate Finance Institute. (2018). Cash Flow Statement - How a Statement of Cash Flows Works . Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/accounting/cash-flow- statement%E2%80%8B/
