Corporate Cash Flow Statement

What are the different sections in a cash flow statement?

There are three sections in a cash flow statement: Cash flows from operating activities, cash flows from financing activities and cash flows from investing activities. The net increase or decrease in cash flows during the period is added to the cash and cash equivalents balance at the start of the period, to get the cash and cash equivalents balance at the end of the period.

What are the different sources and uses of cash recognised as part of the operating activities?

Operating activities are the principal revenue-generating activities of an entity. The cash flows in this section include:

• Cash receipts from sale of goods and provision of services to customers
• Cash payments to suppliers of goods and services
• Payments for salaries and wages
• Payments for operating expenses such as rent, office and other administrative and selling expenses

There are two methods for presentation of cash flows from operating activities:

Under the indirect method, the operating cash flow section is presented as a reconciliation from the profit or loss as per the income statement. The direct method is a comprehensive summary of the actual cash receipts and payments from operating activities. The net cash flows from operating activities is always the same, irrespective of whether we use the indirect or the direct method.

What items are recognised in the investing activities section of the cash flow statement?

Investing activities are those which result in changes in the size and composition of the investments of the business, and include:

• The acquisition and disposal of long-term assets such as property, plant and equipment and intangible assets; and
• Strategic long-term debt and equity investments

What items are recognised in the financing activities section of the cash flow statement?

Financing activities are those which result in changes in the size and composition of the borrowings and owners’ capital such as the:

• Issuance and redemption of bonds
• Proceeds from new loan or repayment of existing loan; or
• Issuance of equity shares

What is the usefulness of a cash flow statement?

The cash flow statement provides an analysis of the different sources and uses of cash in operating, investing and financing activities of the business and complements the accruals based financial statements.

• Cash flows from operating activities can be compared to the company’s net income to determine the quality of earnings
• If a company has cash losses from operations or is financing investments by raising debt or equity capital, it will show up on the cash flow statement
• The cash flow statement may also help with future projections of cash flows and to determine the liquidity needs