Question

• Why is the statement of cash flows a useful document?
• What can creditors, investors, and other users learn from an analysis of the cash flow statement?
• What are the advantages and disadvantage of having a large cash balance?
• Using the Apple company, analyze and report on the statement of cash flows. (Comment on operating, investing, and financing activities)

Answer 1

(1): Statement of cash flows is a useful document because it shows how much cash went into and out of a company during a specific period of time. This information is not provided by income statement as it includes non-cash revenues and expenses as well. Moreover the statement of cash flow also segregates the movement of cash as per different areas like operating activities, financing activities and investing activities. This makes the statement quite useful as well as important for different purposes.

(2): Creditors, investors and other users can learn about the actual cash being generated by a company. A creditor has to determine a company’s credit worthiness and its ability to generate cash before providing loans. An investor will have to determine a company’s ability to generate cash flows especially free cash flows before making any investments. (Free cash flow = cash flow from operations – capital expenditure). Other users like credit rating agencies, banks, financial institutions etc. also use a company’s cash flow to learn about its generation of cash and this information eventually affects their decision making with regards to the company.

(3): The advantages of having a large cash balance is that the business will be less dependent on borrowings and debt for expansion purpose and will be able to expand and grow business making use of existing cash balance. With fewer borrowings the company’s interest expenses will fall and its credit risk and financial risk will also reduce significantly. Large cash balances also enable companies to better deal with situations of recession and economic downturn. In terms of disadvantages having large cash balance may lead to missed financial opportunities as there is an opportunity cost of holding cash. There will be pressures from investors as well as the investors may want to use the excess cash for the purpose of growing the business. Lastly it can lull the managers of a company into a false sense of security and this may lead to careless spending.

(4): For Apple the latest annual report available is that for the year ending September 29, 2018. As per the company’s 2018 annual report the company generated cash from operating activities to the tune of $77,434 million. This was a much higher amount compared to the company’s 2017 figure of $64,225 million. This improvement can be attributed to the higher net income generated by the company in 2018 and better management of its working capital during the year. The company’s generated an amount of $16,066 million in 2018 from investing activities. This is a substantial improvement from 2017 when Apple used $46,446 million of cash in investing activities. The improvement was mainly because of higher proceeds from maturities of marketable securities and lower levels of purchase of marketable securities. The company’s cash flow from financing activities deteriorated as it used an amount of $87,876 million in 2018 compared to the amount of $17,974 used in 2017. This deterioration can be attributed to higher amount of repurchase of its common stock in 2018 and higher repayments of term debt.