Statement of Cash Flows

General Information that can be extracted from a statement of Cash Flow:

Was the company profitable?

Did the company generate positive cash flow?

How did the company generate its cash flow? 

To generate cash you need sales or payments on accounts receivable.

Forms of investment can also be converted into cash (bonds, stock, loans)


Examples of cash outflow would be: the purchase of stock, capital investments, payments, salaries, etc..


Tips when working with cash flows 


Cash flow from Operating Activities + Cash flow from Investing Activities + Cash flow from Financing Activities = Change in Cash account for the period!

Regardless of the section of the cash flow statement that you are preparing (operating, investing or financing)
  -If an item is a cash Inflow you add that item:
  -If an item is a cash Outflow, you subtract that item. 


Operating Activities-> Day to day operations-> usually the largest amount of cash account->production & sales of goods and services

  Asset accounts related to IS

Accounts receivable

Inventories

Liability accounts related to IS

Accounts payable

Accruals

Warning: Notes payable NOT included! Belongs to financing activities.

Investing Activities->  Buying or selling productive assets (plant & equipment) and buying or selling of financial securities.


 

Inflows:

Selling long-lived assets such as gross property, plant & equipment (i.e., fixed assets)

Selling debt or equity securities of other firms

Outflows:

Buying long-lived assets such as gross property, plant & equipment (i.e., fixed assets)

Buying debt or equity securities of other firms

Tips

Investing activities refer to changes on the lower left-hand side of balance sheet

Warning: we want changes in gross fixed assets. We don’t want the changes in net fixed assets!

But, if gross fixed assets not reported in balance sheet, ….?

 

Change in gross fixed assets = change in net fixed assets + depreciation  

Depreciation (on IS) = change in accumulated depreciation (on BS)

Cash Flows from Financing Activities

Loans from creditors (long-term, short-term) 

Repayment of principal

Sale or repurchase of stock (common or preferred) from firm’s equity holders 

Payment of dividends (selling stock is a part of the financial activities)

 

Inflows:

Proceeds from long and short term borrowing (increase in notes payable, long-term debt)

Proceeds from issuing the firm’s own equity securities (increase in common stock) 

Outflows:

Repayment of debt principal (decrease in notes payable, long-term debt)

Repurchase of firm’s own shares (decrease in common stock)

Payment of dividends