Thus, an increase in net working capital is a net investment in the firm’s
current assets, and an increase in an asset is considered a use of cash. A de-
crease in net working capital is a divestment of assets—that is, a source of
cash.
A modified net working capital amount is used to compute cash flow
from operating activities, as standard definitions of current assets include
cash and marketable securities and standard definitions of current liabili-
ties include notes payable. In the statement of cash flows, changes in notes
payable are considered a financing flow and thus appear as a component of
the cash flows from financing activities. The change in the cash account ap-
pears at the bottom of the statement, as the sum of cash flows from operat-
ing, investing, and financing activities. From Table 2.5, we know that the
net cash inflows from operating activities for Johnson & Johnson in 2003
are $10,595 million, primarily composed of net income of $7,197 million.
The net cash flows from investing and financing activities are $4,526 mil-
lion and –$3,863, respectively.
The investing activities section of the statement of cash flows repre-
sents the investments a firm makes in both its own fixed assets and the
equity of other firms, including subsidiaries or joint ventures. (These
holdings are listed in the investment account of the balance sheet.) In-
creases and decreases in these accounts are considered investment activi-
ties. Johnson & Johnson pursued capital expenditures of $2.262 billion
in 2003 and made acquisitions of $2.812 billion. The cash flow from in-
vestment activities is the change in gross plant and equipment plus the
change in the investment account. The changes are added if they repre-
sent a source of funds; otherwise, they are subtracted. The dollar changes
in these accounts are computed from the beginning and ending bal-
ance sheets.
The financing activities section of the statement of cash flows includes
cash flows arising from purchases and sales of notes payable and long-term
securities and dividend payments to equity holders (recall that interest pay-
ments to bondholders help determine the firm’s net income, which is part
of cash flows from operating activities). Cash flows from financing activi-
ties are computed as financing sources minus financing uses. Sources in-
clude increases in notes payable and new issues of bonds, preferred stock,
and common stock, since these actions result in cash inflows. Uses include
principal payments or the repurchase of notes payable, bonds, or stock.
Dividend payments to equity holders also are considered a financing use.
Table 2.5 shows that net cash used by financing activities in 2003 was
$3,863 million, composed primarily of dividend payments of $2,746 mil-
lion, and decreases in short-term borrowings of $1,072 million.
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