Question

Statement of Cash flow :-

1) What does a Cash flow statement depict? What does it say about the company? ( positive and negative cash flow)

2) Analysis of cash flow statement: How does one know where the company is getting the cash from ? What is the company spending the cash on?

Answer 1

1.  A cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents. The depiction of cash inflow and outflow is divided into operating, investing, and financing activities. In other words, the cash flow statement depicts the flow of cash in and out of the business.

A cash flow, as an analytical tool, is useful in determining the short-term viability of a company, particularly its ability to pay bills. A negative cash flow would mean that the company could not continue to pay its bills without borrowing money (financing activity) or raising additional capital (investment activity). Positive cash flow means your business is running smoothly and is generating enough cash to pay off its liabilities.

2. As mentioned above, a cash flow statement is divided into 3 categories: Operating, Investing, Financing Activities. Operating activities include the production, sales and delivery of the company's product as well as collecting payment from its customers. Investing activities include purchases of physical assets, investments in securities, or the sale of securities or assets. Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividend.

On careful analysis of such distribution, we can get the information regarding where the company is getting the cash from, and where such cash generated is being spent.

For example, positive financing cash flow is an indicator of the fact that the company has a shortage of liquid assets and the same have been borrowed by the company via equity or debt.

Positive operating cash flow is an indicator of the fact that the operations of the company are sustainable and are generating positive cash flows.

Negative investing cash flows can indicate that the company has invested in purchasing new assets which would be used for the further expansion of the company.