Financial Accounting: IFRS, 3rd Edition

CHAPTER 13 Statement of Cash Flows

FEATURE STORY

What Should We Do with This Cash?

In today’s environment, companies must be ready to respond to changes quickly in order to survive and thrive. This requires that they manage their cash very carefully. A company’s cash needs, and how it addresses them, depend on many factors. For example, many high‐tech companies need significant cash in order to grow, especially in their early years. To conserve cash, some young companies pay their employees with company shares, or share options. Not only does this conserve cash, but it creates an incentive for employees to work hard. If the company succeeds, then the value of its company shares will increase.

Successful mature companies frequently generate lots of cash—often exceeding their immediate needs. This excess cash is often referred to as “free cash flow.” A company with significant free cash flow must decide what to do with this cash. If it doesn’t want to expand its capacity in its existing product lines, it might decide to acquire businesses in other industries. Or, it might increase its dividend payments, buy back shares, or pay down its debt.

In some instances, management will simply accumulate mass amounts of cash, which can result in shareholder criticism. For example, Keyence (JPN), a manufacturer of sensors and measuring instruments, generated significant amounts of cash for many years. The company is debt‐free and not inclined toward acquisitions. But, it also has been reluctant ...