Mastering Financial Statements: A Beginner's Guide to Cash Flow

Understanding Financial Statements

Financial statements can be straightforward to interpret; often, their complexity arises from the way they are taught. In this guide, we will simplify the process for you. Our focus will be on Apple Inc. (ticker symbol: AAPL), helping you grasp the essentials of their financial statements.

In our previous discussion, we provided an overview of financial statements and examined the Balance Sheet in detail. Now, let’s dive into the Cash Flow Statement.

Overview of the Cash Flow Statement

The Cash Flow Statement captures how much cash a company generates over a specific period, such as a quarter or year. This statement serves as a true indicator of a company's financial health, reflecting the actual cash inflows and outflows.

To illustrate this, let's check Apple's Cash Flow Statement on Morningstar.

The Cash Flow Statement is categorized into three main sections:

Cash Flows from Operating Activities
Cash Flows from Investing Activities
Cash Flows from Financing Activities

Let's break down each of these sections in detail.

Cash Flows from Operating Activities

This part reveals the cash generated from a company's core business operations.

For Apple, this section includes:

Net Income: The total earnings of the company after deducting all expenses, taxes, interest, and other costs from total revenue.

Net Income = Total Revenue — Total Expenses

Depreciation & Amortization: This indicates the reduction in value of tangible and intangible assets over time. Depreciation applies to physical assets like buildings and machinery, while amortization applies to intangible assets like patents and trademarks.
Deferred Income Tax: This represents future income tax liabilities or receivables.
Accounts Receivable: The money owed to Apple by its customers for goods and services already delivered.
Inventory: The value of raw materials, work-in-progress, and finished goods.
Accounts Payable: The amount Apple owes to its suppliers for goods and services received on credit.
Other Working Capital: The difference between current assets and current liabilities, encompassing accounts receivable, inventory, and accounts payable.
Other Non-Cash Items: Entries that do not involve cash transactions.

At the conclusion of this section, you will see the Net Cash provided by Operating Activities, an essential metric that reflects the cash generated from operations, often referred to as Operating Cash Flow.

Cash Flows from Investing Activities

This section outlines the cash generated from Apple's investment activities.

Key components include:

Investment in Property, Plant, and Equipment: Cash spent on tangible assets to enhance production capacity.
Acquisitions Net: The net cash impact of acquiring another company, factoring in cash inherited from the acquisition.
Purchases of Investments: Investments in stocks, bonds, and mutual funds.
Sales/Maturities of Investments: Cash inflows from selling or maturing investments.
Purchases of Intangibles: Investments in intangible assets like patents and copyrights.
Other Investing Activities: Loans to other entities and miscellaneous investing transactions.
Net Cash Used for Investing Activities: The overall cash impact from investment activities.

Cash Flows from Financing Activities

This section reveals the cash generated from financing activities.

It includes:

Common Stock Issued: Cash received from issuing common stock.
Preferred Stock Issued: Cash generated from preferred stock issuance, which has fixed dividends but no voting rights.
Dividends: Cash paid to shareholders as a return on their investment.
Other Financing Activities: Miscellaneous financing transactions.
Net Cash Provided by Financing Activities: The total cash generated from financing actions.

The final part of the Cash Flow Statement includes vital metrics such as:

Net Change in Cash: The overall cash flow from operating, investing, and financing activities.
Free Cash Flow: Calculated as Operating Cash Flow minus Capital Expenditures (Capex), this indicates the cash remaining after covering operating expenses and investments.

The growth in Apple's Free Cash Flow from 2018 to 2022 is noteworthy:

2018 to 2019: -8.17%
2019 to 2020: 24.62%
2020 to 2021: 26.66%
2021 to 2022: 19.90%

Consistently rising free cash flow signifies a robust financial position.

In our next article, we will explore Income Statements in greater detail.

Learn how to read and analyze a cash flow statement like a CFO in this beginner-friendly video.

Discover the intricacies of reading and analyzing a balance sheet like a CFO in this informative video.