Understanding the Three Sections of a Cash Flow Statement: Operating, Investing, and Financing Activities

WHAT IS A CASH FLOW STATEMENT?

A statement of cash flows is a financial statement that provides aggregated data about all the cash flows a business receives from going concern operations and external investments. It also includes all cash flows paid to operating and investing activities over a given period.

Any company’s cash flow statement gives a detail of all the transactions that are made to the investors and the analysts. This contributes to success. This statement is considered the most important part of any business.

It calculates the cash flow in three ways.

1. Through operations
2. Investments
3. financing

The sum of these three known segments is called the net cash flow.

HOW DOES THE CASH FLOW STATEMENT WORK?

The three main financial statements are

• balance sheet
• income statement
• cash flow statement

The cash flow statement is known as an important document that helps interested parties get an overview of all the transactions taking place in a business.

THERE ARE TWO DIFFERENT BRANCHES OF ACCOUNTING:

Conditioning and cash flow. Most public companies use accrual accounting, which basically means that the income statement is not the same as the company’s cash position. However, the cash flow statement focuses on cash accounting.

Profitable businesses may need to be managing cash flow properly, which is why the cash flow statement is an essential tool for businesses, analysts, and investors. The cash flows is divided into three major different business activities:

OPERATIONS, INVESTMENTS, AND FINANCING.

Such a business sells any certain product and appraises the customer. Even if this sale is recognized as income, the business may receive money later on a later date. The business makes a profit on the income statement and pays taxes on it, but the business may earn more or less than the sales or income figures.

OPERATING CASH FLOW

The first section of the cash flow statement covers all cash flows from operating activities (CFOs) and includes transactions from all operating businesses. The operating cash flow section starts with net income and then matches all non-cash items with cash from operating activities. In other words, it is the net result of the company, but in the form of cash.

This section presents the cash inflows and outflows arising directly from the company’s main business activities. Such activities include any sales and purchase of supplies, inventory, and giving salaries to the employees. All other forms of cash inflows and outflows, such as investments, debt, and dividends, are not included.

Businesses can generate enough positive cash flow to grow their operations. If they are fully generated, they may be able to find external growth financing in order to thrive.

For example

Accounts all the receivable is a non-cash account. If accounts receivable increase over a period of time, it means that sales increased, but money has yet to be received at the time of sale. The cash flow statement deducts accounts receivable from net income because it is not cash. Cash flows in the operating section can also include accounts payable, amortization, amortization, and many prepaid items that are recognized as income or expenses but have no associated cash flows.

THREE CASH FLOWS

1. Operating activities include treasury activities related to net income. For  illustration, cash generated from the  trade of goods( income) and cash paid for goods( charges) are business conditioning because both income and charges are included in net income.
2. Investment activities include treasury activities related to long-term assets. Long-term assets include long-term investments; (2) fixed assets; and (3) principal amounts of loans to other entities. For example, proceeds from the sale of land and payments made for an investment in another company are included in this category. (Please note that interest received on loans is included in operating activities.)
3. Financing activities include treasury activities related to long-term debt and equity.

CASH FLOW FROM INVESTING ACTIVITIES

This is the second part of the cash flow statement. It looks at cash flow from investments (CFI) and is the result of investment gains and losses. This section also includes money spent on property, plant, and equipment.

When CapEx increases, it usually means cash flow decreases. It is considered good all the time. It basically shows that any business is investing in future betterment and operations. Companies with high CapEx tend to be growth companies.

While positive cash flow in this section can be considered good, investors will prefer companies that generate cash flow from their businesses rather than through financing and investing activities. Businesses can generate cash flow in this section by selling equipment or goods.

CASH FLOW FROM FINANCING ACTIVITIES

Cash flow from finance (CFF) is the final section of the cash flow statement. This section provides an overview of cash used for corporate finance. It measures the cash flow between a business and its owners and creditors, and its source is usually debt or equity. These numbers are usually reported annually on the company’s 10-K Report to Shareholders. Analysts use cash flow from the financials section to determine how much a company has paid out in dividends or stock buybacks. It is also useful to help determine how a company raises capital for operational growth.

Cash obtained or repaid through fundraising efforts, such as equity or debt, is listed here, as well as loans drawn or repaid.

When cash flow from finance is a positive number, it means that more money is coming into the business than going out. When the number is negative, it could mean that the company is paying off debt or paying dividends and buying back shares.

WHAT TYPES OF CASH FLOWS APPEAR IN OPERATIONS?

Cash inflows and surges from trade exercises such as buys and deals of stock and supplies, compensation installments, accounts payable, devaluation, amortization, and prepayments are recognized as wages and costs.

WHEN THE CAPITAL EXPENDITURE INCREASES, WHAT HAPPENS TO CASH FLOW?

Typically, cash flow is decreased because some of the cash has already been used in the investment of future operations. This helps in supporting the future growth of the business.

What does negative cash flow from finance mean? A negative number can indicate that a company is paying off debt, paying dividends, or buying back stock.

THE STATEMENT OF CASH FLOWS HAS THREE MAIN PARTS:

1. Cash flow statement from any operating activities
2. cash flow statement from any investing activities.
3. cash flow statement from any financing activities.

Although the Finance Monkey UAE company uses accrual accounting as its primary reporting system, the cash flow statement is based on cash. The overall cash flow statement helps everyone, such as managers, analysts, and investors, in evaluating overall business performance. In general, investors prefer companies that derive most of their cash flow from operations rather than investing and financing.