How to Read a Financial Report, 9th Edition

1 STARTING WITH CASH FLOWS

Summary of Cash Flows for a Business

Savvy business managers, lenders, and investors pay a lot of attention to cash flows. Cash inflows and outflows are the pulse of every business. Without a steady heartbeat of cash flows, a business would soon have to go on life support—or die. So, we start with cash flows.

Cash inflows and outflows appear in a summary of cash flows. For our example in Exhibit 1.1, we use a business that has been operating for many years. This established business makes profit regularly and, equally important, it keeps in good financial condition. It has a good credit history and banks lend money to the business on competitive terms. Its present stockholders would be willing to invest additional capital in the business, if needed. None of this comes easy. It takes good management to make profit consistently, to secure capital, and to stay out of financial trouble. Many businesses fail these imperatives, especially when the going gets tough.

EXHIBIT 1.1 SUMMARY OF CASH FLOWS DURING YEAR

Dollar Amounts in Thousands
Cash Flows of Profit-Making Activities
From sales of products to customers, which includes some sales made last year	$(51,680)
For acquiring products that were sold, or are still being held for future sale	$(34,760)
For operating expenses, some of which were incurred last year	$(11,630)
For interest on short-term and long-term debt, some of which applies to last year	$11,(520)
For income tax, some of ...