Ways To Read Cash Flow Statement

So far in this series we've looked at the income statement and balance sheet for Apple, Inc.. The last "financial statement I will discuss is the cash flow statement. Cash flow is the difference in a company's cash balance during a specific period of time.

Examining the cash flow statement is the main way to evaluate the health of a company. The cash flow statement shows you where the cash is coming from and where it is going.

The cash flow statement breaks down your cash transactions into three separate categories: Operating, Investing, and Financing Activities.

The best way to explain cash flow from investing activities is to teach you how it's calculated. Here are the steps to calculate it:

1. Start with the Net income
2. Add depreciation

3. Add deferred income (The money received up front for a sale which has not billed yet)

1. Subtract the rise in accounts receivable and inventory (If receivables and inventories go up, money goes down and vice versa)
2. Insert the Increase in accounts payable (If payables go up, so does money balance)

This calculation will give you with the cash flow from operating activities. If you have any questions feel free to ask me in the comment section below.

The capital expenditures and investments that Apple made are accounted for under cash flow from operating activities. Capital expenditures are payments for property, plant, and equipment. Investments include the purchase and sale of marketable securities.

*After closer examination, it appears that Apple has negative cash flow this period because they invested lots of cash in marketable securities. According to their annual report on SEC.gov, they bought $102B of marketable securities and received $70B in proceeds from sales, leading to a net difference of $32B in negative cash flow for actions related to investing. This provides me with some relaxation as an investor. I'd much rather this be the reason for negative cash flow vs. not collecting receivables or transferring stock.

This calculation will give you with the cash flow from operating activities. If you have any questions feel free to ask me in the comment section below.

The capital expenditures and investments that Apple made are accounted for under cash flow from operating activities. Capital expenditures are payments for property, plant, and equipment. Investments include the purchase and sale of marketable securities.

*After closer examination, it appears that Apple has negative cash flow this period because they invested lots of cash in marketable securities. According to their annual report on SEC.gov, they bought $102B of marketable securities and received $70B in proceeds from sales, leading to a net difference of $32B in negative cash flow for actions related to investing. This provides me with some relaxation as an investor. I'd much rather this be the reason for negative cash flow vs. not collecting receivables or transferring stock.

Cash Flow From Financing Activities

Lending activities are the payment of dividends, sale or purchase of company stock, and borrowing activity. Apple issued $831M shares of its own stock and paid a $520M finance charge in 2011. They do not pay a dividend to shareholders.

As you can see from above, Apple completed the year with a negative aash flow of $1.446B. According to the balance sheet, their cash balance dropped from $11.261B in 2010 to $9.815B in 2011. After having a closer look, we realized that Apple invested a substantial sum of cash in marketable securities that resulted in negative cash flow for the year. Despite having a negative cash flow, Apple still finished the year with a nearly $10B cash balance.

*If you want to view the actual financial statements of a publicly owned company like Apple check out SEC.gov. Just enter in the business name or ticker symbol and click the report you want to view (the annual report is filed as 10-K).

When you have any questions about the cash flow statement or some of those financial statements we discussed, don't hesitate to ask me at the comment section below.

Learning to read financial statements was the single most important things I learned in my MBA program. Hopefully, in the 9 minutes or so it took you to read my 3 posts on financial statements, I managed to show you the way to do this.

Quick Story

Before I sign off, I'd like to give you a quick story. About 10 years ago, before my formal business education, I bought my first stock - Sirius Satellite Radio (SIRI). This was prior to the merger with XM Satellite Radio. A friend of mine recommended that I look it over, so I did. My research involved reading a few paragraphs about the company and thinking it over for about 30 minutes before I made the purchase. I bought 2000 shares. After all, this stock was going to make me rich.

I held the stock for a few years until I attended my first business school class on how to read financial statements. I distinctly remember going home one night after class and looking up the financial statements for Sirius Satellite Radio the very first time. My heart sunk as I scrolled through their financial information.

After reviewing the statements, I realized that I invested most of my life savings in a company that had never turned a profit! It was a horrible investment.

I looked quickly over my shoulder to see if any one had noticed the stupid decision that I made (as if anyone was watching me at home on my computer)... then I logged into my investment account and I put in a sell order.

I couldn't wait for the market to open the next day so that I could find some poor soul to purchase my shares. Thankfully, I liquidated my position and walked away without losing my shirt. It was a close one.

The reason why I tell this story is because you may be in a similar position as I was. You may rely on your friends and advisors for financial advice. Do yourself a favor- After you read this article, log into your investment account and look at a few of the investments that you own. What are the names of the companies? Do they have a history of positive earnings and cash flow? Do they have an excessive amount of debt?

If you see any red flags, I encourage you to pick up the phone and call your trusted friends and advisors and ask them these same questions. Chances are... they won't have the answers.

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