Introduction
In addition to an income statement and a balance sheet statement, a cash flow statement is used in order to conclude regarding the generation and distribution of cash in a company. The analysis of this statement is important to examine possible changes in the cash flows related to a firm’s operating, financing, and investing activities and decisions (Epstein, 2014). The aim of this paper is to discuss the purpose of a cash flow statement and provide an analysis of Ford Motor Company’s financial status with reference to its cash flows.
Purpose of a Cash Flow Statement
Analysts usually examine cash flow statements along with other important financial statements. The primary purpose of a company’s cash flow statement is to represent the sources of generating cash for an enterprise, as well as the details regarding the cash spending. These cash inflows and outflows are usually reported for a certain period of time, and they can be compared to the cash flows set for the same period in past years (Öztürk, 2015). The focus on these data allows for concluding regarding a firm’s liquidity with reference to its cash receipts and cash payments, as well as a firm’s solvency (Deo, 2016). From this perspective, analysts pay attention to cash flows from operating activities, investing activities, and financing activities (Epstein, 2014). This information is collected and analyzed by existing and potential investors and analysts in order to evaluate the net change in an organization’s cash to conclude about the strategic and financial effectiveness of its activities, as well as this firm’s financial position.
Analysis of Ford Motor Company’s Cash Flow Statement
The analysis of a cash flow statement for a company depends on the ratio analysis. The key ratios that are used by analysts to determine a firm’s liquidity and solvency include FCF / OCF and Cash Flow Margin. The FCF / OCF ratio indicates the relation of free cash flows (including cash from operations and investments) to operating cash flows (Epstein, 2014). Accordingly, FCF / OCF for Ford Motor Company equals ($9,045 + ($-14,290)) / $9,045 = -0.58 = -58% (Ford Motor Company, 2012). This ratio means that the firm cannot generate enough cash in order to use it for the organization’s needs and address capital providers’ interests.
Cash Flow Margin is utilized when it is necessary to determine how much revenue can be turned into an operating cash flow when a company needs this. This ratio is calculated with the help of dividing the cash from a company’s operations by sales (Epstein, 2014). For Ford Motor Company in 2012, Cash Flow Margin equals $9,045 / $126,567 = 0.07 = 7% (Ford Motor Company, 2012). This result is rather low, indicating that Ford Motor Company has problems with its profitability and liquidity. It means that the company cannot successfully use the generated cash flow in order to address all its operating needs.
Conclusion
In order to understand what cash is available to a company within different periods of time in order to cover its short-term and long-term liabilities, as well as to demonstrate a firm’s liquidity, it is necessary to analyze a cash flow statement and calculate cash flow ratios. There are many ratios that can be applied by analysts in order to conclude regarding an organization’s financial status, and they are based on measuring cash flows from operating activities, investing activities, or financing activities. The choice of the ratio for analysis depends on the purpose of an analyst’s evaluation of a company’s profitability, liquidity, and solvency.
References
Deo, P. (2016). Evaluating a cash flow statement. International Journal of Business, Accounting, & Finance, 10(1), 22-42.
Epstein, L. (2014). Financial decision making: An introduction to financial reports. Bridgepoint Education, Inc.
Ford Motor Company. (2012). Profitable growth for all: Ford Motor Company 2012 Annual report. Web.
Öztürk, C. (2015). Some issues related to cash flow statement in accounting education: The case of Turkey. Accounting and Management Information Systems, 14(2), 398-431.