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Should each section of the cash flow statement show an increase in cash for a healthy...

Should each section of the cash flow statement show an increase in cash for a healthy organization?

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Answer #1

The statement does not hold good.

A cash flow statement is divided into 3 parts (Operating, Investing and financing). Operating activities shows cash flow in relation to operation and higher the increase in cash shows that organization is doing good and healthy in terms of cash rotation in its operation but on the other hands Investing activities and financing activities is vice-versa with respect to Operating Activities.

In Investing activities Cash will increase only with the sale or Asset, So when the company is selling the Asset or its investment to increase its cash it does not represent a good health for the company. In the other words it will represent that the company is in need for cash and so it is selling its assets and investment.

In financing activities the cash will increase in increasing the outside finance i.e. debt or further raise of capital which again is not a healthy sign.

Hence we can say that only in Operating Section cash increase always show a healthy organization but not in the case of other 2 section..

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