Scribd
Upload
26 views3 pages

Statement of Cash Flows

Uploaded by

ALIHYA SHIN
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
26 views3 pages

Statement of Cash Flows

Uploaded by

ALIHYA SHIN
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

The Statement of Cash Flows is one of the key financial statements used to evaluate a company's

financial performance. It provides detailed information about a company's cash inflows and
outflows over a specific period of time, helping stakeholders understand how the company
generates and uses cash. Unlike the income statement, which is based on accrual accounting, the
cash flow statement focuses purely on actual cash transactions.

The statement of cash flows is typically divided into three main sections:

1. Operating Activities

2. Investing Activities

3. Financing Activities

Each of these sections provides insight into different areas of the company's financial activities.
Let’s go through these sections in more detail.

1. Operating Activities

Operating activities are the day-to-day activities that involve the production and delivery of goods
and services. This section reflects the cash that a company generates or spends in the normal
course of business operations.

Key Components:

• Cash Inflows:

o Receipts from customers (sales revenue)

o Interest received on loans or investments

o Dividends received

• Cash Outflows:

o Payments to suppliers and employees (operating expenses)

o Payments for taxes

o Interest paid on loans or other financial obligations

Methods for Calculating Operating Cash Flow: There are two main methods used to prepare the
cash flow from operating activities:

• Direct Method: This method directly lists cash inflows and outflows from operating
activities. However, it’s less commonly used because it requires more detailed data.

• Indirect Method: The indirect method starts with net income and adjusts for changes in
working capital (e.g., changes in accounts receivable, inventory, and accounts payable),
depreciation, and other non-cash expenses.
For most companies, the indirect method is used to prepare the statement of cash flows. The
adjustments typically look like this:

Formula (Indirect Method): Cash from Operating Activities=Net Income+Non-


cash expenses+Changes in working capital\text{Cash from Operating Activities} = \text{Net Income}
+ \text{Non-cash expenses} + \text{Changes in working
capital}Cash from Operating Activities=Net Income+Non-
cash expenses+Changes in working capital

2. Investing Activities

Investing activities reflect cash transactions related to the acquisition and disposal of long-term
assets. These are typically investments in property, plant, and equipment (PP&E), as well as
purchases and sales of securities and other investments.

Key Components:

• Cash Inflows:

o Sale of property, plant, and equipment (PP&E)

o Sale of investments (stocks, bonds, etc.)

o Collection of loans made to others

• Cash Outflows:

o Purchase of property, plant, and equipment (PP&E)

o Purchase of investments

o Loans made to others

Investing activities generally show how much cash a company is spending to expand or improve its
asset base, or how much cash it’s receiving from the sale of investments or long-term assets.

3. Financing Activities

Financing activities reflect cash transactions related to a company’s equity and debt, such as
borrowing or repaying money, issuing shares, or paying dividends.

Key Components:

• Cash Inflows:

o Issuance of stock (new equity raised)

o Borrowing funds (issuing bonds, taking out loans)

• Cash Outflows:
o Repayment of debt (principal on loans or bonds)

o Payment of dividends

o Repurchase of stock (buybacks)

Financing activities provide insight into how a company raises capital and repays its obligations. A
strong financing section often reflects that the company is able to raise funds either through equity
or debt to support growth, while a negative financing section could indicate that the company is
paying off debt or repurchasing shares.

You might also like