The Statement of Cash Flows

The Statement of Cash Flows

The statement of cash flows is the summary of a company’s cash flows, summarized by operations, investment activities, and financing activities.

Cash flow from operations is cash flow from day-to-day operations.

Cash flow from operating activities is basically net income adjusted For:

  • Noncash expenditures
  • Changes in working capital accounts
The Statement of Cash Flows
The Statement of Cash Flows

The adjustment for changes in working capital is necessary to convert net income, calculated using the accrual method, into actual cash flow.

  • Increases in current assets and decreases in current liabilities are positive adjustments.
  • Decreases in current assets and increases in current liabilities are negative adjustments.

Cash flow for/from investing is the cash flows related to the acquisition (purchase) of plant, equipment, and other assets, as well as the proceeds from the sale of assets.

Cash flow for/from financing activities is the cash flow from activities related to the sources of capital funds (e.g., buyback common stock, pay dividends, issue bonds).

The sources of a company’s cash flows can reveal a great deal about the company and its prospects.

For example, a financially healthy company tends to consistently generate cash flows from operations (that is, positive operating cash flows) and invests cash flows (that is, negative investing cash flows). To remain viable, a company must be able to generate funds from its operations; to grow, a company must continually make capital investments.

By studying the cash flows of a company over time, we can gauge a company’s financial health.

For example, if a company relies on external financing to support its operations (that is, reliant on cash flows from financing and not from operations) for an extended period of time, this is a warning sign of financial trouble up ahead.

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