Cash Flows

Cash Flow

Naiya Mae

XACC/291

January 10, 2015

Cash Flow

The cash flow statement is one of the financial statements prepared by businesses. The main purpose of the cash flow statement is to provide information regarding the cash receipts, cash payments, and changes in cash from operating, investing, and financing activities. In contrast to the income statement and balance sheet, the cash flow statement does not report future cash that has been made on credit. Instead, the cash flow statement reports actual cash generated. The cash flow statement provides important information to investors and creditors to assist in evaluating: the company’s ability to generate future cash, pay dividends and meet obligations, assess the cause for the difference between net income and net cash provided by operating activities, and gain a better understanding of the changes in assets and liabilities (Weygandt, Kimmel, & Kieso, 2010).

Companies generate and utilize cash in different ways; therefore the cash flow statement is divided into three sections: cash from operating activities, cash from investing activities, and cash from financing activities. Operating activities consists of the cash generated and used during its normal business activities. This section of the cash flow statement is considered the most important section because it provides the best picture of how a company generates sufficient cash that will benefit its stockholders. Examples of operating activities include cash from goods sold and services rendered, royalties, supplier purchases, and payroll. Cash from investing activities constitute: the sale of investments in debt or equity securities of other entities; the purchase and sale of property, plant, and equipment; lending money and collecting money received from loans to other entities (Weygandt, Kimmel, & Kieso, 2010). Financing activities section describes information about a company’s financing activities. These activities include cash obtained from issuing long-term debt and repaying money borrowed; and cash received from the sale of common stock, paying long-term debt or acquiring treasury stock, and paying dividends to stockholders.

There are other activities that do not involve cash but are related to the investing and financing activities of a company. These noncash activities include issuing common stock to purchase assets, converting bonds into common stock, issuing debt to purchase assets, and exchanging plant assets.

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