The statement of cash flows is one of the most important financial statements, if not the most important. It acts as a bridge between the Balance Sheet and Profit & Loss statement to let the analyst know where the cash has been used. It tells what is the source of cash and where is its application. Cash is the most liquid form of asset for any company. Any entity with poor cash flow management can go bust within years.

The Structure

The three components of Cash Flow Statements are:

  1. Cash from operating activities

It reflects how much cash is generated from a company’s core business. Activities pertaining to the core business of a company is known as operating activities. Example of operating activities are:

  • Salaries paid out to employees
  • Interest income and dividends received
  • Income tax paid and interest paid
  • Display advertisements to attract new customers

2. Cash from investing activities: Just like individuals, a company also makes certain investments to take benefits in the future. The cash inflows and outflows pertaining to investment comes in this criterion. Cash flows from buying and selling long-term assets are also counted in this criterion. Example of Investing activities are:

  • Proceeds from the sale of PP&E.
  • Acquisitions of other businesses
  • Purchases of marketable securities
  • Sale of fixed assets

3. Cash from financing activities: Activities such as issuing dividends, paying interest to debt taken and raising fresh debt, etc come under this criterion. Any change in equity capital and borrowing is included in this segment. Example of financing activities are:

  • Repayment of existing loans
  • Sale of treasury stock
  • Paying cash dividends on its capital stock
  • Cash from new stock issued

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