Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionII. Financial Statements
and Long−Term Financial
Planning- Working with Financial
Statements
(^90) © The McGraw−Hill
Companies, 2002
flow (or some component of cash flow) is not an alternative to accounting income, so
only earnings per share are to be reported.
As shown in Table 3.4, it is sometimes useful to present the same information a bit
differently. We will call this the “sources and uses of cash” statement. There is no such
statement in financial accounting, but this arrangement resembles one used many years
ago. As we will discuss, this form can come in handy, but we emphasize again that it is
not the way this information is normally presented.
Now that we have the various cash pieces in place, we can get a good idea of what
happened during the year. Prufrock’s major cash outlays were fixed asset acquisitions and
cash dividends. It paid for these activities primarily with cash generated from operations.
Prufrock also retired some long-term debt and increased current assets. Finally, cur-
rent liabilities were not greatly changed, and a relatively small amount of new equity
was sold. Altogether, this short sketch captures Prufrock’s major sources and uses of
cash for the year.
CONCEPT QUESTIONS
3.1a What is a source of cash? Give three examples.
3.1bWhat is a use, or application, of cash? Give three examples.
58 PART TWO Financial Statements and Long-Term Financial Planning
TABLE 3.4 PRUFROCK CORPORATION
2002 Sources and Uses of Cash
($ in millions)
Cash, beginning of year $84
Sources of cash
Operations:
Net income $363
Depreciation 276
$639
Working capital:
Increase in accounts payable $ 32
Long-term financing:
Increase in common stock 50
Total sources of cash $721
Uses of cash
Working capital:
Increase in accounts receivable $ 23
Increase in inventory 29
Decrease in notes payable 35
Long-term financing:
Decrease in long-term debt 74
Fixed asset acquisitions 425
Dividends paid 121
Total uses of cash $707
Net addition to cash $ 14
Cash, end of year $98