What is Cash Flow Statement?
Cash flow statement is an important part of the financial statements that provides entire data regarding all cash inflows a company receives from its ongoing operational activity and external investment resources.
It also includes all cash outflows that pay for business activities and investment over a period of time.
Cash flow statement helps the liquidity position of the company or how efficiently the company can convert its assets into cash to meet the short term obligations. Creditors have the power to push company into liquidation if they are not paid on time. Even, company has many assets but company can face liquidity issues if such assets cannot readily be converted into cash.
There are three category in cash flow. These are,
(a)Cash flow from operating activities:
This is the first section of cash flow statement and Cash flow from operating activities reveals the cash generated from the main activity in which the company is directly involved.
Example
● Cash realized from debtors
● Cash paid to creditors
● Cash paid as salary
● Sale of goods & services
Interpretation
It shows the extent to which the company's business operation contributes to the cash balance. Positive net cash flow from operating activities indicates the healthier sign because it shows the efficiency of management in managing working capital through speedy recovery of credit sales and delayed payment to creditors.
Negative net cash flow from operating activities is not healthy sign because inefficiency of management cannot manage its working capital easily.
(b)Cash flow from investing activities:
This is the second section of cash flow statement and it represents cash inflows and outflows relating to buying & selling of fixed assets. Purchase of fixed assets indicates to generate future cash flows and income.
Example
● Sale of fixed assets
● Purchased of fixed assets
Interpretation
A negative net cash flow from investing activities indicates that the company has purchased new machinery or invested in new projects because company has new plan to expand the business and to generate future cash inflows.
A positive net cash flow from investing activities indicates that the company has sold off its fixed assets. Because the company hasn't new plan. Depending upon the scale of transaction, sustainable sale of fixed assets by the company can be an early sign of warning for the investors.
(c)Cash flow from financing activities:
This is the last section of cash flow statement and it shows those cash flows which alters the capital structure of the company. It also shows cash flows which are used in financing the business.
Example
● Issue of shares for cash
● Issue of debentures for cash
● Repayment of dividends.
Interpretation
A positive cash flow from financing activities indicates that company has raised more capital in form of equity or debenture.
A negative cash flow from financing activities reflects that the company has utilized its cash to repay its debt or for making dividend payment to shareholders or for buy back equity capital.
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