BAYSHORE MANAGEMENT PARTNERS
192 Marina Drive, Long Beach, CA 90803 P: 562-427-4371 F: 562-430-0712 howard@bayshorepartners.org
Cash Flow Part 2 – Sources and Uses of Funds
By Howard Fletcher February 15, 2007 The previous article explained the difference between profit and cash flow, or accounting income and economic income. This article deals with the sources and uses of funds, which is elemental in understanding cash flow. The sources and uses of funds statement deals with changes in assets, liabilities and capital. It identifies sources from which funds were derived and the uses to which funds were devoted. The following chart depicts how funds move.
The Sources and Uses of Funds Statement on the following page illustrates how changes in assets and liabilities either generate or use funds. It is important to remember that in this context funds mean cash. The collection of an accounts receivable turns that receivable into cash. An increase in inventory uses cash due to purchases. Example In the following statement the decrease in Accounts Receivable and Inventory was a source of funds while the increase in Other Current Assets and Fixed Assets used funds. Similarly, the decrease in most Current Liabilities used funds while the increase in Long Term Debt was a source of funds. In this example the company generated $49,750 and used $61,785 in funds through changes in assets and liabilities, leaving an unmet financing requirement of $12,035. If the company did not have a beginning cash balance in excess of $12,035 it would have closed its doors.
BAYSHORE MANAGEMENT PARTNERS
192 Marina Drive, Long Beach, CA 90803 P: 562-427-4371 F: 562-430-0712 howard@bayshorepartners.org
2003 Current Assets Accounts Receivable Inventory Other Current Assets Fixed Assets Tangible Fixed Assets (Cost) Intangible Assets (Cost) Other Fixed Assets (Cost) Current Liabilities Accounts Payable Notes Payable CP/Long Term Debt Accruals Other Long Term Liabilities Funded Long... [continues]
192 Marina Drive, Long Beach, CA 90803 P: 562-427-4371 F: 562-430-0712 howard@bayshorepartners.org
Cash Flow Part 2 – Sources and Uses of Funds
By Howard Fletcher February 15, 2007 The previous article explained the difference between profit and cash flow, or accounting income and economic income. This article deals with the sources and uses of funds, which is elemental in understanding cash flow. The sources and uses of funds statement deals with changes in assets, liabilities and capital. It identifies sources from which funds were derived and the uses to which funds were devoted. The following chart depicts how funds move.
The Sources and Uses of Funds Statement on the following page illustrates how changes in assets and liabilities either generate or use funds. It is important to remember that in this context funds mean cash. The collection of an accounts receivable turns that receivable into cash. An increase in inventory uses cash due to purchases. Example In the following statement the decrease in Accounts Receivable and Inventory was a source of funds while the increase in Other Current Assets and Fixed Assets used funds. Similarly, the decrease in most Current Liabilities used funds while the increase in Long Term Debt was a source of funds. In this example the company generated $49,750 and used $61,785 in funds through changes in assets and liabilities, leaving an unmet financing requirement of $12,035. If the company did not have a beginning cash balance in excess of $12,035 it would have closed its doors.
BAYSHORE MANAGEMENT PARTNERS
192 Marina Drive, Long Beach, CA 90803 P: 562-427-4371 F: 562-430-0712 howard@bayshorepartners.org
2003 Current Assets Accounts Receivable Inventory Other Current Assets Fixed Assets Tangible Fixed Assets (Cost) Intangible Assets (Cost) Other Fixed Assets (Cost) Current Liabilities Accounts Payable Notes Payable CP/Long Term Debt Accruals Other Long Term Liabilities Funded Long... [continues]
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