How to read a cash flow statement

How to read a cash flow statement is always primarily asked question whenever you come across learning or understanding the financial statement of any company.

Cash flow word clearly explains itself that it talks about the flow of cash into the companies accounts, Now how you can read that is what we are going to learn here.

Frequently Asked Questions?

How the cash flow statement is prepared?
What is the cash flow statement with example?
What does cash flow statement mean?
Why cash flow statement is important?

Cash Flow statement includes the inflow and outflow of cash from the companies account book. Now there are mostly activities which take money in and send it out. 

The cash flow statement (CFS) measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses. 

Cash Flow statement plays a vital role for an investor to understand where its money is coming from, and how money is spending. It helps them to understand the financial position of the company for now and in the coming future. 

The cash flow statement has three major areas to understand or read the flow of cash are

  • Cash from Operating Activities
  • Cash from Investing Activities
  • Cash from Financing Activities

Cash from Operating Activities:

Cash from operating activities is one part in understanding cash flow statement includes the flow of income from companies main business operation activities.

This cash from operation includes below listed activities like

Profit from operations: Whatever business company is doing has earned some income from its daily operations are added here.

Receivables: These are expected income to come from some operations or activities the company has done before.

Inventory: It includes money invested in maintaining inventory for production or related activities.

Payables: Payables is the amount that the company is to pay in coming time for whatever thing they buy or rent.

Loans Advances: Loan Advance means any full or partial advance of a Loan made by Lender to or for the benefit of Borrower.

Working capital changes: A change in working capital is the difference in the net working capital amount from one accounting period to the next.

Direct taxes: This section includes taxes bound by the government to pay for all the companies.

Cash from Investing Activities:

Investing activities include any sources and uses of cash from a company’s investments. A purchase or sale of an asset, loans made to vendors or received from customers, or any payments related to a merger or acquisition is included in this category.

Fixed assets purchased: Here the company spend money on buying assets either to maintain its ongoing business or for business expansion.

Fixed assets sold: Here the company may sell its unused assets or old and outdated assets to recover its value. 

Capital WIP: WIP – Work in progress includes a major part of the capital from investing activities.

Investments purchased: Company buy a new investment which can offer them better returns in the coming period.

Investments sold: Investment income came from selling investments that the company brought earlier.

Interest received: Here we can say the company is getting income in the form of interest from all its bonds investment.

Dividends received: Here we can say the company is getting income in the form of dividends from all its shares investment.

Other investing items: This list includes other investing items.

Cash from Financing Activities:

Cash from financing activities includes the sources of cash from investors or banks, as well as the uses of cash paid to shareholders. Payment of dividends, payments for stock repurchases, and the repayment of debt principal (loans) are included in this category. 

Proceeds from shares: Income from selling stocks, mutual funds, property, or other assets is reported on a personal or corporate tax return. 

Proceeds from borrowings: Cash received from the issuance of debt instruments such as debentures. Proceeds from bank borrowings or borrowings from other financial institutions.

Repayment of borrowings: Payment of the borrowing that the company had taken for any specific purpose in past.

Interest paid: Company paid dividend against the shares of the company hold by its Bold Holders. 

Dividends paid: Company paid dividend against the shares of the company hold by its Share Holders. 

Financial liabilities: Interest paid by the company against the owing capital loan for activities company want to achieve.

Other financing items: This list includes other financing items.

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