Cash Flow

Cash Flow

By: Christopher Gilbert

XACC/291

May 9, 2015

Investopedia defines cash flow as, “a revenue or expense stream that changes a cash account over a given period.” (Investopedia, 2015) Investopedia also mentions that some of the financial activities that take place are financing, operations, and investing. A business or company needs these activities and records to be successful. It is crucial that business and companies prepare cash flow statements. My reasoning for cash flow being crucial is because it provides important information to external users. Those external users are investors, creditors, unions, analysts, and the consumer. In some cases it could provide valuable information to lending institutions as well. Cash flows can also be applied to a specific project, or to a business as a whole. Statements of cash flow help those users make sound decisions about the financial state of a business or a company. This provides valuable information to those external users when determining growth for the company or business. Cash flow statements not only provide information to external users, they also focus on the amount of cash a company has acquired or produced and provides a prediction of the company. The prediction being future expansion. Cash flow statements are also divided into three sections that generate cash into the business or company.

The first section is cash flow from operating activities and they portray the inbound and outbound of cash pertaining to everyday business. Everything from paying vendors to paying for shipping of a product to a customer. “To calculate the cash flow from operating activities, the company starts with net income, then adds back in any depreciation expenses, deferred taxes, accounts payable, accounts receivables, and one-time charges.” (InvestorGuide Staff, 2013)The second section of cash flows are investing. This section is associated with buying and selling of non-recent assets. This section also shows how much money the company has made from buying or selling subsidiaries. In the financing section of cash flows, InvestorGuide states, “This is where the company reports the money that it took in and paid out in order to finance its activities.” (InvestorGuide Staff, 2013) If a company or business fails to record these transactions. Heavy consequences could affect the business or company. The negligence of recording cash flows could cause a business to lose money and eventually could end up in bankruptcy.

References

Investopedia. (2015, 05 10). Cash Flow. Retrieved from Investopedia: http://www.investopedia.com/terms/c/cashflow.asp

InvestorGuide Staff. (2013, 01 25). The Three Parts of Cash Flow Statements Explained. Retrieved from InvestorGuide.com: http://www.investorguide.com/article/11625/the-three-parts-of-cash-flow-statements-explained-igu/