Statement of Cash Flows Flashcards
What is the main function of a statement of cash flows?
To provide financial information about the cash receipts and cash payments of a business for a specific period of time.
The primary purpose of the statement of cash flows is to provide financial information about the cash receipts (inflows) and cash payments (outflows) of a company for a specific period of time.
To help investors, lenders and other creditors, and others in their analysis of a company’s cash position, the statement of cash flows reports?
Reports the effects on cash of a company’s 1) operating activities, 2) investing activities, and 3) financing activities during the period of time.
What is presented first in the statement of cash flows? And what else does the statement show?
Operating activities are normally presented first in the statement of cash flows, followed by either investing or financing activities. In addition, the statement shows the net increase or decrease in cash during the period, and the cash amount at the end of the period.
DECISION TOOLKIT:
Does the company generate enough cash from operating activities to fund its investing activities?
Info needed for decision: Statement of cash flows
Tools to use for decision: The statement of cash flows shows the amount of cash provided or used by operating activities, investing activities and financing activities.
How to evaluate results: Compare the amount of cash provided by operating activities with the amount of cash used by investing activities. Any deficiency in cash from operating activities must be made up with cash provided by financing activities.
Understanding where its cash comes from and where it goes is critical for a company. The statement of cash flows provides answers to these simple but important questions - which questions are they? Explain operating, investing and financing activities
1) where did cash come from during the period? 2) How was cash used during the period? 3) What was the change in the cash balance during the period?
The statement of cash flows answers these questions by summarizing cash flows as operating, investing, or financing activities. A user of this statement can then determine the amount of cash provided (or used) by operating activities, the amount of cash provided (or used) for investing purposes, and the amount of cash provided (or used) by financing activities.
Operating activities are activities the company performs to generate profits. It is desirable for cash provided by operating activities to be a positive (cash provided) balance rather than using cash for operating activities. A positive source of cash from operating activities can help pay for investments to grow the business.
Investing activities include the purchase or sale of long-lived assets used in operating the business, or the purchase or sale of long-term investment securities. For most growing companies, cash is used by investing activities (a negative balance) rather than investing activities being a source of cash because growing companies purchase or replace more assets than the opposite.
Financing activities include borrowing or repaying money, issuing or repurchasing shares, and paying dividends. For most growing companies, cash is provided by financing activities (a positive balance) rather than being used for financing activities. Most growing companies have to borrow money or issue shares rather than being able to repay it. As companies mature, they are able tore pay financing and this balance becomes negative (cash used) more often than positive.
