Cash Flow Statement

  • Post last modified:14 May 2023
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  • Post category:Accounting

What is Cash Flow Statement?

The cash flow statement shows the inward and outward flow of cash of a company within a fixed period. A cash flow statement is a financial statement that shows how much cash and cash equivalents have come into and gone out of a business during a specific period of time.

It provides a detailed breakdown of a company’s operating, investing, and financing activities.


Cash Flow Statement and their Analysis

The general practice that is followed by most companies is to report their cash flow statement on a quarterly or monthly basis.

The cash flow is broken out into three reporting areas:

  1. Operating
  2. Investing
  3. Finance.

The cash flow statement was originally known as the flow funds statement or statement of changes in financial position.

Purpose of the Cash Flow Statement

The cash flow statement is intended to provide information on a firm’s liquidity or solvency. The cash flow provides a clear understanding of a company’s financial resources at a given point in time.

This statement is important for several reasons:

  1. Evaluating liquidity: The cash flow statement helps investors and analysts assess a company’s ability to meet its short-term obligations by showing its cash inflows and outflows over a period of time.
  2. Planning for cash needs: The cash flow statement can also help a company plan for its future cash needs by identifying periods when cash inflows are expected to be low or when significant cash outflows are expected.
  3. Identifying cash flow drivers: By analyzing the cash flow statement, investors and analysts can identify the sources of a company’s cash inflows and outflows, such as changes in operating activities, investing activities, or financing activities.
  4. Comparing performance: The cash flow statement can also be used to compare a company’s performance over time or to compare its performance to that of other companies in the same industry.

Overall, the cash flow statement provides valuable information about a company’s cash flow position, which is important for making investment decisions, managing cash flows, and planning for future growth.

Operating Activities

Operating activities represent the incoming and outgoing cash activities to run the day-to-day operation of a business. The net cash flow from operating activities represents the money made from the sales of products and services.

These items include receipts from goods sold, tax payments and interest received from loans. Operating activities is the most critical component of the cash flow statement, because it shows if a company is able to turn a profit based on its current business model at this exact moment in time.

If a company is unable to turn a profit from their business activities, odds are that the company will be experiencing finance issues and or making investments in hardware or software without any proof of success.

Investing Activities

Investment activities represent the cash flow from the purchase of long-term assets required to make or sell goods and services. Investment activities also include purchases of stocks or other securities. A major issue that potential investors have with the investing activities section is that the money listed here represents activities paid for in cash.

Therefore, if a company were to purchase Rs.5 million dollars worth of equipment with only Rs.1 million cash and Rs.4 million in financing, only the Rs.1 million will show up under investing activities.

Financing Activities

Financing cash flow is related to money in and out to investors and shareholders. When a company raises funds from bonds or stock, it is considered cash in. Dividends paid out to investors and interest paid to bondholders is considered cash out.

The cash flow statement shows how much cash comes in and goes out of the company over the quarter or the year. At first glance, that sounds a lot like the income statement in that it records financial performance over a specified period.

Three Sections of the Cash Flow Statement

Companies produce and consume cash in different ways, so the cash flow statement is divided into three sections: cash flows from operations, financing and investing. The sections on operations and financing show how the company gets its cash, while the investing section shows how the company spends its cash.

  1. Cash Flows from Operating Activities
  2. Cash Flows from Investing Activities
  3. Cash Flow from Financing Activities

Cash Flows from Operating Activities

This section shows how much cash comes from sales of the company’s goods and services, less the amount of cash needed to make and sell those goods and services. Investors tend to prefer companies that produce a net positive cash flow from operating activities.

High growth companies, such as technology firms, tend to show negative cash flow from operations in their formative years. At the same time, changes in cash flow from operations typically offer a preview of changes in net future income.

Normally it is a good sign when it goes up. Watch out for a widening gap between a company’s reported earnings and its cash flow from operating activities. If net income is much higher than cash flow, the company may be speeding or slowing its booking of income or costs.

Cash Flows from Investing Activities

This section largely reflects the amount of cash the company has spent on capital expenditures, such as new equipment or anything else that needed to keep the business going. It also includes acquisitions of other businesses and monetary investments such as money market funds.

You want to see a company re-invest capital in its business by at least the rate of depreciation expenses each year. If it does not re-invest, it might show artificially high cash inflows in the current year, which may not be sustainable.

Cash Flow from Financing Activities

This section describes the goings on of cash associated with outside financing activities. Typical sources of cash inflow would be cash raised by selling stock and bonds or by bank borrowings. Likewise, paying back a bank loan would show up as a use of cash flow, as would dividend payments and common stock repurchases.


Cash Flow Statement Considerations

Savvy investors are attracted to companies that produce plenty of free cash flow (FCF). Free cash flow signals a company’s ability to pay debt, pay dividends, buy back stock and facilitate the growth of business.

Free cash flow, which is essentially the excess cash produced by the company, can be returned to shareholders or invested in new growth opportunities without hurting the existing operations. The most common method of calculating free cash flow is:

Net Income + Amortisation/Depreciation – Changes in Working capital – Capital Expenditure = Free Cash Flow.


Concept of Fund Flow Statement

A statement shows how the financial resources have been used during a particular period. It is thus, a historical statement showing sources and application of funds between the two dates designed especially to analyse the changes in the financial conditions of an enterprise.

What is Fund Flow Statement?

The funds-flow-statement is a report on financial operations changes, flow or movements during the period. It is a statement, which shows the sources an application of funds or it shows how the activities of a business are financed in a particular period.

Meaning of Fund Flow

The term “flow” means change or movement of funds in terms of net working capital. It means inflow or increase and outflow of decrease of fund, i.e. net working capital, as a result of certain financial transactions that have taken place in the firm during the specific period.

All financial transactions finally affect the balance sheet, but they all do not affect the net working capital of the firm. There is a certain class of transactions, which cause an increase of funds, while the other causes a decrease of funds in the firm. Therefore, identifying changes in net working capital requires an understanding of the effects of the financial transactions on net working capital.

Causes of Flow of Funds

The following types of transactions cause change (increase or decrease) of funds:

  • Transactions involving current liabilities and non-current liabilities.
  • Transactions involving current liabilities and non-current assets.
  • Transactions involving current assets and non-current assets.
  • Transactions involving current assets and non-current liabilities and owner’s equity.
  • Transactions involving non-operating receipts and non-operating loss.

Distinction between Cash Flow and Fund Flow Statement

Following are the differences between Cash Flow and Fund Flow Statement:

  1. Funds Flow Statement is concerned with all items constituting funds (Working Capital) for the business while Cash Flow Statement deals only with cash transactions.
    In other words, a transaction affecting working capital other than cash will affect Funds statement and not the Cash Flow Statement.
  2. In Funds Flow Statement, net increase or decrease in working capital is recorded while in Cash Flow Statement; individual item involving cash is taken into account.
  3. Funds Flow statement is started with the opening cash balance and closed with the closing cash balance. It records only cash transactions.

Cash Flow Statement is started with the opening cash balance and closed with the closing cash balance while there is no opening or closing balances in Funds Flow Statement.


FAQ

What is Cash Flow Statement?

The cash flow statement shows the inward and outward flow of cash of a company within a fixed period. A cash flow statement is a financial statement that shows how much cash and cash equivalents have come into and gone out of a business during a specific period of time.

What is Fund Flow Statement?

The funds-flow-statement is a report on financial operations changes, flow or movements during the period. It is a statement, which shows the sources an application of funds or it shows how the activities of a business are financed in a particular period.

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