M10 Evaluating Cash Flows

Analyzing a Statement of Cash Flows

Overview of the Statement of Cash Flows

• The video introduces an analysis of the statement of cash flows for Northern Movie Company, referencing materials available in the Moodle section for module 10.

• The cash flow summary shows cash provided by operating activities at $76,900, cash used in investing activities at -$112,000, and cash provided by financing activities at $31,000.

Understanding Cash Flow Changes

• Initial cash decreased from $14,000 to $9,900; this decline may seem negative but requires deeper analysis through the statement of cash flows.

• Emphasis is placed on the importance of positive cash flow from operating activities as it indicates sustainable business operations.

Evaluating Operating Activities

• The net income based on accrual accounting was reported at $50,000; however, actual cash generated from operating activities exceeded this amount.

• A healthy positive number in operating activities is crucial for sustaining company operations.

Insights on Investing Activities

• Negative cash flow from investing does not necessarily indicate poor performance; it often reflects investments in future growth (e.g., purchasing equipment and land).

• Selling off long-term assets to generate positive investing activity would be concerning as it's unsustainable.

Assessing Financing Activities

• Positive financing activity can be tricky; high numbers might suggest reliance on borrowing to sustain operations rather than strong operational performance.

• Context matters: borrowing to fund significant investments can be acceptable if managed properly.

Conclusion on Overall Cash Flow Evaluation

• A decrease in overall cash flow ($41.90 decrease from $14,000 to $9,900) should prompt a thorough evaluation rather than immediate concern.

• Key takeaways include ensuring robust operating activity numbers and understanding the implications behind investing and financing figures.