So far this series we’ve looked at the income statement and balance sheet for Apple, Inc. The last financial statement I’m going to discuss is the cash flow statement. Cash flow is the difference in a company’s cash balance during a particular time period. Examining the cash flow statement is the most important way to gauge the health of a company. The cash flow statement shows you where the cash is coming from and where it’s going. The cash flow statement breaks down your cash transactions into three separate categories: Operating, Investing, and Financing Activities.

The simplest way to explain cash flow from investing activities is to tell you how it’s calculated. Here are the steps to calculate it: 1) Start with net income 2) Add depreciation 3) Add deferred income (The cash received up front for a sale that hasn’t billed yet) 4) Subtract the rise in accounts receivables and inventory (If receivables and inventory go up, cash goes down and vice versa) 5) Add the rise in accounts payable (If payables increase, so does cash balance) This calculation provides you with the cash flow from operating activities. If you’ve got questions feel free to ask me in the comment section below.

The capital expenditures and investments that Apple made are taken into account under cash flow from operating activities. Capital expenditures are payments for property, plant, and equipment. Investments are the purchase and sale of marketable securities. *After closer examination, it appears that Apple has negative cash flow this period since they invested a lot of cash in marketable securities. According to their annual report on SEC.gov, they purchased $102B of marketable securities and received $70B in proceeds from sales, resulting in a net difference of $32B in negative cash flow for activities related to investing. This provides me with some comfort as an investor. I’d much rather this be the reason for negative cash flow vs. not collecting receivables or moving inventory.

Financing activities are the payment of dividends, sale or acquisition of company stock, and borrowing activity. Apple issued $831M shares of its own stock and paid a $520M finance charge in 2011. They don’t pay a dividend to shareholders. As you can tell from above, Apple finished the year with negative cash flow of $1.446B. According to the balance sheet, their cash balance dropped from $11.261B in 2010 to $9.815B in 2011. After taking a closer look, we realized that Apple invested a significant amount of cash in marketable securities which 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’d like to view the actual financial statements of a publicly owned company like Apple check out SEC.gov. Just type in the company name or ticker symbol and click the report you’d like to view (the annual report is filed as 10-K). Should you have any questions about the cash flow statement or any of the financial statements we discussed, don’t hesitate to ask me in the comment section below. Finding out how to read financial statements was one of the most important things I learned in my MBA program. Hopefully, in the 9 minutes or so that it took you to read my 3 articles on financial statements, I was able to teach you how to do this.

Before I sign off, I’d like to leave you with a quick story. About 10 years ago, before my formal business education, I purchased my first stock – Sirius Satellite Radio (SIRI). This was prior to merger with XM Satellite Radio. A friend recommended that I check it out, 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 evening after class and looking up the financial statements for Sirius Satellite Radio for the 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 find out 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 in the morning so that I could find some poor soul to buy 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 some 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 notice any red flags, I encourage you to pick up the phone and contact your trusted friends and advisors and ask them these same questions. Chances are they won’t have the answers.

To reach your leadership goals check out the goal setting worksheet at the Margin of Excellence site.. Check here for free reprint license: The Ultimate Way to Read a Cash Flow Statement.

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Posted in Entrepreneur by Charles Schuler No Comments Yet