A Statement of Cash Flows, also known as a Cash Flow Statement, is a financial document that showcases how changes in balance sheet accounts and income affect cash and cash equivalents. It paints a clear picture of how a company generates its cash and where that cash is spent over a period. Therefore, it gives investors a better understanding of the liquidity of a company and its ability to cover payroll, operations and more. There are three main components of a Statement of Cash Flows: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.
1. What is represented by cash flow from operating activities?
Cash flow from operating activities refers to the cash made from the regular business operations of a company. Essentially, it reveals how much cash the company generates from selling its goods or services in the core business operations.
2. What information does cash flow from investing activities offer?
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Cash flow from investing activities shows the earned or spent money in longer term investments like property or equipment (capital expenditures), and investment securities. This element displays how much a company is investing in its future operations.
3. Can you explain what cash flow from financing activities is?
Cash flow from financing activities reflects changes in equity, borrowings, or dividends. It’s related to investors and creditors and includes activities that involve issuing stock, bonds, paying dividends, and adding or changing loans.
4. Why is a Statement of Cash Flows important?
A Statement of Cash Flows is essential because it provides insights into a company’s liquidity, the capacity to pay bills, and fund growth without external financing. It complements other financial statements like balance sheets and income statements.
5. What are non-cash activities?
Non-cash activities are transactions that do not have direct cash flow effects, and they are not part of the Statement of Cash Flows. They include depreciation or write-offs on bad debts or credit losses, among others. These are usually reported in footnotes on a financial statement.