Cash Flow Statement – Net Change in Cash
Net change in cash in the Cash Flow Statement is the increase or decrease in cash and cash equivalents from the beginning to the end of a year. It is equal to the net change in cash and cash equivalents as a result of the company’s operating, investing and financing activities. It is also equal to net income plus depreciation and other non-cash items.
This figure should equal the difference between cash the firm holds at the beginning of the reported period (e.g., one year) and the amount that it holds at the period’s end. Positive net cash flow means the firm has more cash, and negative cash flow means the firm has less, compared to the beginning of the period.
It is easy to say that a positive change in cash is good while a negative change is bad, yet what matters is how cash is increased and spent. Generally, you want cash to come from business operations: Increasingly positive cash flow from operating activities is a good sign. A few periods of decreasing total cash is not worrisome if a company is spending on worthwhile projects, paying high dividends, paying down debt, or repurchasing shares.
Also, keep in mind that excess cash does not provide a return for shareholders. Companies run the risk of management making risky decisions with a stockpile of cash, such as investing in questionable acquisitions or pet projects.
Multinational companies with operations in several different countries must include exchange rate effects based on the rates used to translate items on their balance sheets. In this case, the cash flow statement can also include a section that reconciles currency translation. Multinational companies will generate revenues in several different currencies. There are accounting rules written to supervise how currency is translated. A separate line item, often called “cumulative effect of exchange rate changes,” or “Effect of exchange rate changes on cash and cash equivalents and restricted cash” details the effect of the currency exchange rate changes on the company’s cash flow.