Hello this is Bob Salvin, the host of the AIChE e- learning course Economic Evaluation for Chemical Engineers.
In this series of short videos we are going to be reviewing financial statements.
This video is part three on the cash flow statement
The financial statements are reports that are issued by a company on a quarterly and year- end basis
to summarize their financial performance.
There are three major reporting statements: the balance sheet, which looks at a summary of the assets, liabilities, and stockholders' equity
for that company at the end of that reporting period; the Income statement, also referred to as
the profit and loss statement, which looks at net income and earnings per share over that time period;
and finally the cash flow statement
which looks at sources and uses of cash, as well as the change in the cash balance, over that time period.
All these reports must adhere to an accounting system known as Generally Accepted Accounting Principles or GAAP,
and these reports are subject to external audit to ensure that they are consistent from period to period
as well as among all companies.
The cash flow statement presents the sources and uses of cash during that reporting period.
It bridges the book income or earnings to actual cash flow,
and we'll see that in a moment on the next slide.
There are three major sections that are included in the cash flow statement.
There is cash from operations, cash from investing activities,
and cash from financing activities.
The net change from each of these will roll up to a total change in the company's cash balance.
The income to cash bridge is very important since net income, as we discussed in the video on the
income statement, is not a cash based number. Adjustments are needed to take the income to actual cash flow.
We need to add back all of the noncash items,
one of the largest of which is depreciation,
we need to adjust for changes in working capital cash effects, and we also need to adjust for
items that are not counted in net income, and we'll see some of those adjustments in a moment.
We are not going to be able to cover every item on the income statement
but we will hit the highlights and I would refer you to an accounting text
for an explanation of some of the other of the items that are included.
The example I've chosen to use is for the Dow Chemical Company for the year 2014.
You'll see that they've included the year 2013 as well as the year 2012 for comparison.
All of these numbers are in billions of dollars, and what you see here is the
operating activity statement in its entirety; we'll break it down for you in the next slide.
The first item as we mentioned will be the net income for 2014
that number is a little bit over $3.8 billion
and then from that number we need to make the adjustments that we noted
to take that number to cash and one of the largest adjustments
is depreciation and amortization addback. Again, this was a noncash expense. That number is $2.7 billion.
Continuing down the sheet, then, the next important part of the operating section is the changes in the assets and liabilities or
working capital which are cash effects, and then finally you get to a total number of $6.5 billion.
This is the cash that was generated from the company's operations for that time period.
The next section is the investing activities and again, here it is in its entirity. Let's break it down for you.
One of the largest uses of cash in this area, and these are investments the company has made, is for capital expenditures,
new PP&E perhaps, and that number, for the time period, was a little bit over $3.57 billion.
We won't go through these items but there are other uses of cash that fall into the category of investment activities.
And finally we get down to the net number, or the net use of cash, in this particular section, of just a little over $3.1 billion.
The final section is on financiing activities. Financing activities focus on debt and stock movements,
and again let's break down that statement for you.
The first item that should jump out at you are the proceeds from long-term debt,
a fairly large number of a little bit over $2.4 billon.
They also pay down some long-term debt;
that number was a use of cash of almost $750 million. They made some purchases of common stock,
well over $4 billion, almost $4.2 billion, and finally, again we won't we will go through the smaller items but the dividends paid to shareholders is a
significant use of cash, a little of over $2 billion.
So these numbers add to a total of $3.58 billion as the use of cash for financing activities.
There's also a small adjustment that Dow includes for foreign exchange, and then you get down to the summary - the little box on the corner looks at
the four items that we just discussed: the operating activities, investment activities, financing activities and foreign exchange,
If you add the four numbers up, you get this number of the use of cash of $286 millon.
They look at the cash balance from the end of the prior period, which is noted right here, $5.94 billion.
That use of cash of $286 millon leaves Dow at the end of the time period with $5.654 billion.
And that concludes our discussion of the cash flow statement. It's one of the three key statements as we've noted. If you want to learn
about the balance sheet and income statement, please visit the other videos in the series, and again this is Bob Salvin, the host of those videos,
and I look forward to having the you join me there.