The statement of cash flows was established in 1987 by the Financial Accounting Standards Board.

The statement of cash flows was established in 1987 by the Financial Accounting Standards Board.

The statement of cash flows was established in 1987 by the Financial Accounting Standards Board. Its purpose is to emphasize the cash flow to the firm’s operations. It will take the accrual-based net income and translate it to actual cash dollars (Block et al., 2019). The three primary sections of the statement of cash flows are the cash flows from operating activity, investing activities, and financing activities (Block et al., 2019). The operating activity is the first section that is presented and determines cashflow information by adjusting net income for items like depreciation expense, change in current assets and liabilities, and other items. Investing activities is the second item presented in the statement. This shows the cash flow generated or reduced from buying or selling plant and equipment or long-term securities. Financing activities are the third section presented and show generated or reduced cash flow from selling or repurchasing securities or cash dividend payments.

The income statement and balance sheet are normally based on the accrual method of accounting. This method will record revenues and expenses when they occur instead of when the cash changes hands (Block et al., 2019). The accrual method is beneficial in matching revenues and expenses in the period they occur to measure profit appropriately, but it can also be a disadvantage because the actual cash flow of a firm may be overlooked. The cash flow statement is beneficial because it takes the information from the balance sheet and income statement that was done with accrual accounting and translates it to a cash basis. This cash basis data gives the firm a better assessment of their ability to pay cash dividends, invest in equipment, and other options.

The information that comes from the combination of the three primary sections of the statement of cash flows is useful because you can see your net cash flow for each section individually and collectively. This is important because you can see where your positive and negative cash flows are generating from which can help you make decisions on future allocations. For example, if your financing and investing activities are creating too much of a decrease in cash flow compared to your increase from operating activity cash flow, you may decide to reduce some investment activities or financing activities. This would help increase cash flow if operating activities stayed the same or they increased in cash flow. It can also help determine if you want to increase investment or financing activities if you believe that enough funds are not being allocated to those sections. Calculating and understanding a firm’s actual cash flow will help you determine the ability to pay stockholder dividends, buy new equipment, or use that money to start different projects (Block et al., 2019). Therefore, it is important to understand and calculate a firm’s cash flow to make the best decisions for the business.

In the cash flow statement of Deere and Company for the first quarter of 2020, there were both inflows and outflows of cash. Deere & Company had an outflow of cash from its operating activities at 508 million dollars. The cash flow from investing activities was an inflow of 1.026 billion dollars. The cash flows from the financing activities was an outflow of 763 million dollars. The total cash flow in cash, cash equivalents, and restricted cash for the first quarter of 2020 was a net decrease of 246 million dollars. Part of this decrease is because of the broad voluntary employee separation program with a total of 136 million in expenses. 127 million was recorded in the first quarter making the net decrease bigger. This should bring an annual savings of about 85 million annually so this expense of 136 million should not be seen in the future.

References

Block, S. B., Hirt, G. A., & Danielson, B. R. (2019). Foundations of financial management (17th                ed.). Retrieved from https://www.vitalsource.com/

John Deere. (n.d.). Investor relations (Links to an external site.) (Links to an external site.). Retrieved from                                      https://investor.deere.com

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