An analyst may have difficulty...

An analyst may have difficulty gaining access to the applicable information needed to determine a company's sources and uses of cash. This is especially true when studying a competitor. One solution is to construct a Cash Flow Statement based on publicly available information (such as the Income Statement and Balance Sheet from a company's annual report). The objective is to develop a framework that provides an accurate estimate of the company's cash flows. It is important for you to learn to construct a Cash Flow Statement as preparation for Unit Three ­ Time Value of Money.

We will continue to use the XYZ Corporation as our example. The company's Balance Sheet for the past two years is shown again in Figure 1.3 and the Income Statement is shown again in Figure 1.4. These two financial statements provide the information for the Cash Flow Statement, and you will want to refer to them as we move through the process.

Now, let's see how we build the Cash Flow Statement. It is grouped into two main sections:
· Funds generated and used by operating activities
· Funds generated by financing activities

Operating Activities

We begin by identifying the operating activities that contribute to the company's cash flow. Then we classify each activity as a source or a use of cash.

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