Question

Describe (in details) the Statement of Cash Flow and explain how it reflects the activity and financial condition of a business?

Answer 1

The statement of cashflow is one of the key statement for analyzing the financial condition of a company besides other statements like Income statements, balance sheet. The statement of cashflow consist of three parts, operating cashflow, Investing cashflow, Financing cashflow.

Operating cash flow: Operating cash flow section consist of cash inflow and outflow related to the main operation of business. The operating cash flow measures the cash flow generated because of key activities performed and revenues generated from them. It indicates whether a company can generate sufficient revenue to continue the continue and grow the operation or It might need external financing. If the operating cash flow of the business is negative then either the business is growing and it needs outsider financing or financial viability of the business is low. Operating cash flow is the most important component of the statement of cash flow.

Investing cash flow: The cash flow from Investment is mainly cash flows which are being Invested by the companies in the purcahse of property, plant and equipment. The Investig cash flow is mostly outflow of cash because the companies are purchasing the equipment for production process. The inflow when some of these machinery are sold. The investing cash flows represent the Investment made by the company and is mostly negative means outflow of cash.

Financing Cash flow: Financing cash flow represents the cash inflow and outflow because of the changes in the capital structure. The inflow in the financing section would be money raised by selling equity and debt while the outflow would be debt repayment, Interest repayment. If the operating cash flow of the business is negative then the raising finance from outsider is the viable option. Financing cash flow represents the changes in the capital structure. An optimal capital structure is the one in which the weightage average cost of capital for the compnay is least.