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Understanding the Cash Flow Statement

July 2017

July 06, 2017 | 11:00 | Dubai

Three Cash Flows – Three Pillars of the Company

In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents.

Cash flow statements assess the amount, timing, and predictability of cash-inflows and cash-outflows, and are used as the basis for budgeting and business-planning.

Activities of a company can be classified as:

  1. Operational activities
  2. Investing activities
  3. Financing activities

  1. Operational activities (OA): Activities that are directly related to the daily core business operations are called operational activities.

Operating activities include:

  • Receipts for the sale of loans, debt or equity instruments in a trading portfolio
  • Interest received on loans
  • Payments to suppliers for goods and services
  • Payments to employees or on behalf of employees
  • Interest payments (alternatively, this can be reported under financing activities in IAS 7)
  • buying Merchandise
  1. Investing activities (IA): Activities pertaining to investments that the company makes with an intention of reaping benefits at a later stage.

Investing activities include:

  • Purchase or Sale of an asset (assets can be land, building, equipment, marketable securities, etc.)
  • Loans made to suppliers or received from customers
  • Payments related to mergers and acquisition.
  1. Financing activities (FA): Activities pertaining to all financial transactions of the company.

Financing activities include:

  • Dividends paid
  • Sale or repurchase of the company’s stock
  • Net borrowings
  • Repayment of debt principal, including capital leases

The bulk of the positive cash flow stems from cash earned from operations, which is a good sign for investors. It means that core operations are generating business and that there is enough money to buy new inventory. The purchasing of new equipment shows that the company has cash to invest in inventory for growth. Finally, the amount of cash available to the company should ease investors’ minds regarding the notes payable, as cash is plentiful to cover that future loan expense.


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Article originally published at Trading Campus India (www.tradingcampus.in)


 

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