Principles of Managerial Finance

CHAPTER 3 Cash Flow and Financial Planning 105

TABLE 3.6 Baker Corporation Statement of

Cash Flows ($000) for the Year

Ended December 31, 2003

Cash Flow from Operating Activities

Net profits after taxes $180

Depreciation 100

Decrease in accounts receivable 100

Decrease in inventories 300

Increase in accounts payable 200

Decrease in accruals ( (^1)  (^0)  (^0) )a
Cash provided by operating activities $780
Cash Flow from Investment Activities
Increase in gross fixed assets ($300)
Changes in business interests  (^0) 
Cash provided by investment activities ( 300)
Cash Flow from Financing Activities
Decrease in notes payable ($100)
Increase in long-term debts 200
Changes in stockholders’ equityb 0
Dividends paid ( (^8)  (^0) )
Cash provided by financing activities  (^2)  (^0) 
Net increase in cash and marketable securities $

5

0

0

aAs is customary, parentheses are used to denote a negative number, which in this
case is a cash outflow.
bRetained earnings are excluded here, because their change is actually reflected in
the combination of the “Net profits after taxes” and “Dividends paid” entries.
check, this value should reconcile with the actual change in cash and mar-
ketable securities for the year, which is obtained from the beginning- and end-
of-period balance sheets.
Interpreting the Statement
The statement of cash flows allows the financial manager and other interested
parties to analyze the firm’s cash flow. The manager should pay special attention
both to the major categories of cash flow and to the individual items of cash
inflow and outflow, to assess whether any developments have occurred that are
contrary to the company’s financial policies. In addition, the statement can be
used to evaluate progress toward projected goals or to isolate inefficiencies. For
example, increases in accounts receivable or inventories resulting in major cash
outflows may signal credit or inventory problems, respectively. The financial
manager also can prepare a statement of cash flows developed from projected
financial statements. This approach can be used to determine whether planned
actions are desirable in view of the resulting cash flows.
An understanding of the basic financial principles presented throughout this
text is absolutely essential to the effective interpretation of the statement of
cash flows.