Explain the Statement of Cash Flows What does each section s

Explain the Statement of Cash Flows. What does each section signify and how is each calculated?

Solution

The information about company\'s cash receipts and cash payments are provided by cash flows. This cash based information differes from accrual based information presented in income statement. For example: an income statement will show the amount of revenue whereas cash flows tatement will show the cash collected from the sale as opposed to the entire revenue. A reconcilation between income reported and cash generated can give a good picture of how the company is managing it\'s cash. In addtion to this, it also provides information on a company\'s investing and financing activities. Cash flows statement has three sections which are operating, investing and financing cash flows

Operating cash flows:

The day to day activities that create revenues such as selling inventory or cash played to suppliers and those activities which are not recorded in investing or financing activities are part of operating cash flows. It focuses on a company\'s cash inflows and outflows from it\'s core operations. It does not include long term capital or investment costs. Cash flow from operating can be calculated in the following way:

Cash Flow From Operating Activities = EBIT + Depreciation - Taxes +/- Change in Working Capital

Cash flow from investing activities:

Cash flow form investing activities include purchasing long term assets and other long term and short term investments such as equity and debt issued by othe companies. Long term assets include property, plant and equipment etc. It reports the change in cash position resulting from purchasing long term assets and investments. cash from investing activity casn be calculated in the follwing way with the help of an example:

If a comapny spend $300,000 to purchase an equipment, that will be shown as negative $300,000 in cash flow statement. If you sell the equipment for $175,000, that will be a positive entry. Therefore cash from investing will be -300,000 + 175,000 = -$125,000

Cash from financing activity:

The obtaining or repaying of capital such as equity and bonds are included in financing activity. Cash inflowin this category include cash receipts from issuing stock or preferred or bonds. Cash outflows include payments to repurchase stock and to repay bonds and other borrowings. It is a category in a company’s cash flow statement that accounts for external activities that allow a firm to raise capital. A company that frequently turns to new debt or equity for cash, for example, could have problems if the capital markets become less liquid.

The formula for cash flow from financing activities is as follows:

Cash Received from Issuing Stock or Debt - Cash Paid as Dividends and Re-Acquisition of Debt/Stock