Updated: Feb 26
Essential Components on Cash Flow Statement
The cash flow statement is one out of three main financial reports that are paid intentions to by the company’s stakeholders. It is crucially imperative to take note of that the Cash Flow statement is not on the same page as the Balance Sheet or Profit and Loss. It excludes the amount of future incoming and outgoing cash that has been recorded on credit and focuses on the cash on hand. In spite of the distinction, the Cash flow statement is deeply analyzed in conjunction with 2 other financial reports to get the whole picture of a business.
Cash flow statement comprised of 3 sections that are presented through cash inflow and cash outflow. Those are operating activities, investing activities, and financing activities.
Operating activities cash flow could be expressed as money in and out to support the main goods or services of a business. Operating cash flow includes any sources and uses of cash from business activities. In other words, it reflects how much cash is generated from the company’s products, like cash received from the sales of products, commissions for sales on behalf of other entities, as well as cash, is spent on costs of manufacturing or paying suppliers. In short, this section measures the cash earned and used by the company. It shows the company’s ability to generate cash from its main products or services. If the figure is positive, that means the company is earning money. On the contrary, it is time for the company’s owner and manager to review and improve the business.
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Investing activities cash flow contains the changes during a reporting period on investment losses or gains. Money from new investment, both from the company or from an investor to the company, and sales of fixed assets are comprised in the investing activities cash flow. In order to maintain and expand the business, the company receives money from outside investors or its owner. Another way to get money is to sell its PPE – property, plant, and equipment. Then, the company spends its money on buying new fixed assets or re-invest into other entities. Therefore, it is not necessary to look at the net cash flow from investing activities and be upset at the business. Let us take an example in the manufacturing industries. Companies in the manufacturing industry like Intel spent lots of money on building and maintaining factories as well as supporting suppliers. Moreover, Intel’s owners could think of selling their PPE in an area so as to gain money and invest in a new factory. All activities as above are considered as investing activities and recorded in Investing Activities Cash flow.
All money that is earned and spent to owners or lenders could be recorded as financing activities cashflow. This section is a result of transactions for long-term funding or return of the funds. Loans, which are money borrowed from banks or third-party entities, and proceeds from issuing stock or long-term debt can be considered as financing activities. If the company paid dividends to its shareholders during the reporting period, the total figure should be there. In conclusion, financing activities cashflow includes all business activities for financing the company.
In short, preparing a cash flow statement could be a hard task because it requires information from both the Profit and Loss statement (Operating Activities) and Balance Sheet (Investing and Financing Activities). However, the Cash flow statement is a good connection to 2 other statements and gives a whole view. Understanding Cash flow reports are necessary to not only company’s owners, managers for plans but also outside stakeholders like investors (decision of investing in the company or not), bank (decision of lending the company or not), potential staffs (decision of applying and hoping of paying salary or not), etc.
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