If one were asked to identify two of the watershed developments in accounting and finance in the 20th century, a strong argument could be made for both the DuPont formula and the introduction of the cash flow statement (CFS) to mandatory Securities and Exchange Commission reporting requirements. Touched upon throughout the first half of this book, the CFS is the ideal counterbalance to the income statement and balance sheet in that it chronicles the sources and uses of cash throughout the period under consideration.
Of additional benefit is the structure of the CFS itself, with sections on operating, investing and financing activities. This nomenclature, when analyzed by section and as a whole, provides a unique window into the strategic and operational employment of cash. Given the analysis of the CFS in earlier chapters, the reader should now be prepared to examine NikoTech's cash flow performance in Y2 with great dexterity.
The value of the CFS lies in an understanding of how data are organized and what the original source of information was. First, all of the information on the CFS comes from either the income statement or the balance sheet, the causal nature of which is now well understood by the supply chain analyst. Second, in the case of current assets and current liabilities, the CFS focuses on changes in their respective line items compared with figures from the previous year. For that reason, increases in current assets are considered a use of cash, whereas increases in accounts payable are considered a source of cash. As we shall soon see with NikoTech, those short-term changes, along with net income and depreciation, have a considerable impact on the overall cash position of a company.