In Table 7.3 we see that the principal uses of funds for the 20X2 fiscal year were dividends, additions to fixed assets, increases in inventories and long-term investment, and a sizable decrease in taxes payable. These were financed primarily by funds provided by operations, a decrease in accounts receivable, and an increase in bank loans. Also of note is the fact that the firm has increased its cash balance by $3,000. In a sources and uses of funds analysis, it is useful to place cash dividends opposite net profits and additions to fixed assets opposite depreciation. Doing this allows the analyst to easily evaluate both the amount of the dividend payout and the net increase (decrease) in fixed assets.
In Aldine's case, having the source of dividend payment being net profit rather than an increase in debt or a decrease in fixed assets is a healthy sign. However, having more of the firm's assets worn away (depreciated) rather than replaced (through additions) may not be such a good sign. The difference for now is small, but this could pose a problem if allowed to continue and grow.
Implications of Funds Statement Analysis. The analysis of funds statements gives us insight into the financial operations of a firm that will be especially valuable to you if you assume the role of a financial manager examining past and future expansion plans of the firm and their impact on liquidity. Imbalances in the uses of funds can be detected and appropriate actions taken. For example, an analysis spanning the past several years might reveal a growth in inventories out of proportion to the growth of other assets or with sales. Upon analysis, you might find that the problem was due to inefficiencies in inventor management. Thus a funds statement alerts you to problems that you can analyze in detail and take proper actions to correct.
Another use of funds statements is in the evaluation of the firm's financing. An analysis of the major sources of funds in the past reveals what portions of the firm's growth were financed internally and externally. In evaluating the firm's financing, you will want to evaluate the ratio of dividends to earnings relative to the firm's total need for funds.
Funds statements are also useful in judging whether the firm has expanded at too fast a rate and whether the firm's financing capability is strained. You can determine whether trade credit from suppliers (accounts payable) has increased out of proportion to increases in current assets and to sales. If trade credit has increased at a significantly faster rate, you would wish to evaluate the consequences of increased slowness in trade payments on the credi: standing of the firm and its ability to finance in the future. It is also revealing to analyze the mix of short- and long-term financing in relation to the funds needs of the firm. If these needare primarily for fixed assets and permanent increases in current assets, you might be disturbed if a significant portion of total financing came from short-term sources.
An analysis of a funds statement for the future will be extremely valuable to you as the financial manager in planning intermediate- and long-term financing of the firm. It reveab the firm's total prospective need for funds, the expected timing of these needs, and their nature - that is,whether the increased investment is primarily for inventories, fixed assets, anc so forth. Given this information, along with the expected changes in trade payables and th; various accruals, you can arrange the firm's financing more effectively. In addition, you car determine the expected closing cash position of the firm simply by adjusting the beginning cash balance for the change in cash reflected on the projected sources and uses statement In essence, the projected change in cash is a residual. Alternatively, you can forecast future cash positions of the firm through a cash budget, where direct estimates of the future cash flows are made.
The purpose of the statement of cash flows is to report a firm's cash inflows and outflows, during a period of time, segregated into three categories: operating, investing, and financing activities. This statement is required under Statement of Financial Accounting Standard-(SFAS) No. 95. When used with the information contained in the other two basic financial statements and their related disclosures, it should help the financial manager to assess anc identify
• a company's ability to generate future net cash inflows from operations to pay debt interest, and dividends;
• a company's need for external financing;
• the reasons for differences between net income and net cash flow from operating activitic;
• the effects of cash and noncash investing and financing transactions.