Cash flow interpretation

@skokst
I can only give you some pointers as this area can get highly analytical and far from what you could expect in the exam:

The overall purpose of the cash flow statement is to enable users to understand and assess the company’s ability to generate cash from its activities viz. operating, investing and financing. It must be analysed together with the SFP and IS
in order to get the full picture.

Tips:
Consistent pattern of greater inflows than outflows indicates strong cash position and may signal that the company can increase its dividend payments, repurchase its shares, reduce its debt or acquire another firm.
The cash flow from operating activities should always be positive and greater than zero as this indicates whether the company is generating cash from its operations and is a positive sign of future growth.
If the company consistently reports growth on its income statement, but has negative cash flow, it may be lacking the ability to translate its growth into cash and are more likely to face liquidity problems, or even default on their short term liabilities.

The cash flow from investing activities indicates a firm’s ability to invest in non-current assets. If the company generates enough cash to invest continually in property, plant and equipment as well as other fixed assets this is good for future prospects.
High deficits in investment may be normal especially when it is compensated for in a high operating surplus.

The cash flow from financing activities should be carefully evaluated when interpreting cash flow statements. Investors should compare current debt financing with past periods to determine if the firm has reduced its debt over the years.

Cash flow statements disclose how a firm raises capital and how it spends funds during a given period. The current standard IAS 7 is flimsy and therefore preparation and classification rules are weak and open to manipulation. This adds to the problems of interpretation.