Cash Flow Flashcards
What is the Cash Flow statement?
The cash flow statement reflects the actual cash moving into and out of a business during a period of time (quarterly, annually).
It reflects the sources and uses of cash flowing through a business during a time period.
The cash flow statement is needed because cash and profit are different. A company may be profitable, but have no cash, and cash is required to keep a company operating.
The cash flow statement starts with the profit number and adjusts that number to account for the actual cash versus promises found in the income statement to arrive at the cash in the business.
Cash flow statements also explain changes in cash from one balance sheet period to another.
How is the Cash Flow Statement broken down?
Cash flow from or used in operations - the cash flow from the day-to-day operations of the business.
- Operating activities include inventory, accounts receivable, wages payable, accounts payable.
Cash flow from or used in investing - the cash flow for capital expenditures and acquisitions. Includes sale or purchase of property, equipment, and capital projects.
- Investing activities include property and equipment purchases and sales, equity investment in a joint venture.
Cash flow from or used in financing activities - the cash flow from receiving or paying back loans, or purchasing or selling company stock.
- Financing activities include short-term loans, long-term loans, equity offers, stock option proceeds, dividend payments, and capital leases.
Owner Earnings
Owner earnings is a measure of the company’s ability to generate cash over a period of time. We like to say it is the money an owner could take out of his business and spend for his own benefit.
Financing a Company
How a company is financed refers to how it gets the cash it needs to start up or expand. Ordinarily, a company is financed through debt, equity, or both. Debt means borrowing money from banks, family members, or other creditors. Equity means getting people to buy stock in the company.
