Ford Motor Company: Operational Procedure – Cash Flow Statement

Purpose – Cash Flow Statement and the Benefits

The cash flow statement is a crucial financial document that summarizes the cash inflows and outflows of a company over a specific period. It provides valuable insights into a company’s financial health, particularly its ability to generate cash and meet its short-term obligations (liquidity). For Ford Motor Company, a detailed cash flow statement helps assess our ability to:

• Fund ongoing operations and invest in future growth.
• Service debt obligations.
• Repay investors (dividends).

Introduction – Cash Flow Statement

The cash flow statement categorizes cash flows into three primary sections: operating, investing, and financing activities. Understanding the difference between cash flow generated from operations and other activities is vital. Cash flow from operations reflects a company’s core business activities, indicating its ability to generate cash through everyday sales and expenses.

Scope – Components of the Cash Flow Statement

The cash flow statement, prepared using the indirect method, consists of three main sections:

1. Operating Activities: This section details cash inflows and outflows related to a company’s core business activities, such as sales of goods and services, payments to suppliers, and employee salaries.
2. Investing Activities: This section details cash inflows from selling investments or property, plant, and equipment (PPE), and outflows for purchasing investments or PPE.
3. Financing Activities: This section details cash inflows from issuing debt or equity (stock) and outflows for repaying debt or repurchasing stock.

Procedures

Procedures for Operating Section – Cash Flow Statement

• Start with Net Income: Begin by using the net income figure from the income statement.
• Adjustments for Non-Cash Items: Analyze income statement line items and adjust net income for non-cash expenses (depreciation, amortization) and non-cash revenues. These adjustments convert net income to cash flow from operations.
• Evaluate Key Accounts:
  • Changes in Working Capital: Analyze accounts like accounts receivable, inventory, and accounts payable to understand how changes in working capital impact cash flow.
  • Other Operating Cash Flows: Identify other operating cash flows, such as interest received and interest paid.

Procedures for Financing Section – Cash Flow Statement

• Debt Financing: Analyze changes in debt accounts like notes payable and long-term debt to determine cash flows from issuing or repaying debt.
• Equity Financing: Analyze changes in equity accounts like common stock and retained earnings to determine cash flows from issuing or repurchasing stock and dividend payments.

Procedures for Investing Section – Cash Flow Statement

• Investment Sales: Analyze the sale of investments (stocks, bonds) to determine cash inflows.
• PPE Purchases: Analyze purchases of property, plant, and equipment to determine cash outflows.
• Investment Purchases: Analyze purchases of new investments to determine cash outflows.

Procedures for Non-Cash Items

The cash flow statement focuses on cash inflows and outflows. However, certain non-cash transactions must be disclosed for transparency. These adjustments typically reconcile net income to cash flow from operations and include:

• Depreciation and Amortization
• Stock Options Issued

Instructions

Analyze the 2018 Statement of Cash Flows and Explain the Relationship Among Cash Generated from Operations, Other Cash-Generating Activities, and Liquidity

(This section requires access to Ford’s 2018 financial statements). Analyze the 2018 Statement of Cash Flows.

• Cash Flow from Operations: This section reveals how much cash Ford generated from its core business activities in 2018. A positive number indicates the company is generating enough cash to cover its operating expenses.
• Other Cash Flows: Analyze the investing and financing sections to understand how Ford used cash from operations and other sources to invest in growth, service debt, and potentially return cash to investors.
• Liquidity Analysis: Compare cash flow from operations to Ford’s current liabilities. A positive cash flow from operations indicates the company is likely able to meet its short-term obligations. A negative cash flow might necessitate using cash from other sources or additional financing to maintain liquidity.

Conclusion

By following these procedures, Ford Motor Company can develop a detailed and accurate cash flow statement using the indirect method. The cash flow statement provides valuable insights into our financial health and liquidity, supporting informed decision-making regarding future operations, investments, and financing strategies.