The cash flow statement is a vital report that explains a firm’s cash and cash equivalent inflows and outflows within a given period. Unlike the balance sheet, the cash flow statement represents the individual changes in financial resources and the related causes (Paolone, 2020). Apart from highlighting a company’s liquidity and solvency, a cash flow statement also predicts the firm’s earnings and ability to generate income. The cash flows under the cash flow statement can be grouped into three constituents, namely operating, investing, and financing activities (Nga et al., 2020). Notably, the cash flow statement can highlight the financial dynamics such as the change in the stock amount based on the available financial resources. Analysts check a firm’s cash flow statement since it provides a clear understanding of the financial status. Cash flow statements eliminate elements of income statements such as provision, write-downs, depreciation, and inventories, which are subjective and only impact the management practices (Paolone, 2020). Accounting and coding regulations insist that companies should make their cash flow statements public so that everyone can understand their operations, investment, and financing activities. The operation aspect of the cash flow statement refers to the liquidity allocated to the firm’s activities and financial policies, especially when deciding the type of dividends to be distributed (Paolone, 2020). It indicates the company’s ability to pay debts and dividends and invest.
Analysts consider the operating, investing, and financing activities when examining the cash flow statement. When analyzing the operating activities, they look at elements such as cash receipts from the sale of goods and services, tax payments and reimbursements, and cash payments to employees (Paolone, 2020). The analysts also investigate the investing activities such as the purchase of property, equipment, and intangible assets. Apart from the investing activities, the analysts check a firm’s financing operations, and some of the aspects covered include distribution of dividends to equity shareholders, repayment of borrowings, and cash flows linked to items classified in equity (Paolone, 2020). However, analysts focus more on operating cash flows since they reflect a firm’s capability to generate cash from business activity.
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Ford Motor Company did well in the financial year 2012. However, this success was majorly witnessed in North America. The revenues from automotive and financial services were $134.252 billion ( Ford Motor Company, 2012 ). Although this return was lower than the one recorded in 2012, the profit margin was still high. While it had significant capital expenditures of $5.5 million, its automotive net cash at the end of the year was $10.0 million ( Ford Motor Company, 2012 ). This observation means that Ford’s operating cash flow was positive; that is, the inflow was more than the outflow. When analyzing a firm’s income statement, one has to subtract the expenses from sales (Stice et al., 2019). Notably, Ford realized a significant profit from its operating activities. Another aspect is the investing activities, which gave Ford $14.290 billion in the year 2012 ( Ford Motor Company, 2012 ). These inflows came from the proceeds from the sale of business, sale, and maturities of securities, and collections of retail and other financial receivables and operating leases. Ford’s investing opportunities cannot be questioned since the company spent a significant percentage of its income in the purchase of securities and acquisitions of retail and operating leases and realized a significant return compared to the years 2011 and 2010 ( Ford Motor Company, 2012 ). This progress shows that Ford is capable of making further investments. Besides, the cash flow from Ford’s investment reflects the company’s growth for the year 2012 (Dhakal, 2019). Another element to consider is the financial activities. In 2012, Ford record 23% of total shareholder returns ( Ford Motor Company, 2012 ). This statement shows that Ford’s shareholder value increased. Companies with steady earnings to have large cash flows and pay adequate dividends (Ngo et al., 2020). Indeed, Ford’s cash flow statement shows the correlation between dividend policy and profitability.
References
Dhakal, L. (2019). Cash flow statement analysis between commercial banks (with reference to Himalayan Bank Ltd. and Global IME Bank Ltd.). American Journal of Industrial and Business Management , 9 (11), 2025-2033. https://doi.org/ 10.4236/ajibm.2019.911133
Ford Motor Company. (2012). 2012 Annual report . https://www.annualreports.com/HostedData/AnnualReportArchive/f/NYSE_F_2012.pdf
Nga, T. T., Tin, P. Q., & Phe, N. S. (2020). Examining the relationship between cash flow statement patterns and the dividend policy: Case of listed enterprises in Vietnamese stock exchange. International Journal of Accounting , 5 (27), 47-69.
Paolone, F. (2020). Accounting, cash flow, and value relevance (Springerbriefs in accounting) (1st ed.). Springer.
Stice, J. D., Stice, E. K., Cottrell, D. M., & Stice, D. (2019). Teaching operating cash flow: One matrix for analysis–two methods for presentation. In Advances in Accounting Education: Teaching and Curriculum Innovations . Emerald Publishing Limited. https://doi.org/10.1108/S1085-462220190000022010
