What do operating and investing activities in the cash flow statement reflect?

One question is fundamental to any business: How much money is coming in versus how much is going out? A cash flow statement answers that and provides a clear picture of whether a company has the cash it needs to pay its debts and fund operating expenses over a set timeframe. It’s one of the most important sources of insight into a company’s financial health.

What Is a Cash Flow Statement (CFS)?

A cash flow statement, also known as a statement of cash flows, is a financial statement that documents the cash and cash equivalents a company generates and spends over a specific period. Cash flow statements reveal a business’s liquidity, help evaluate changes in assets, liabilities and equity, and make it easier when analyzing operating performance.

Key takeaways

• Cash flow statements show the cash impact of the decisions a company makes on operating, investing and financing activities.
• A cash flow statement consists of three sections: cash from operating activities, cash from investing activities and cash from financing activities.
• There are two methods for cash flow statement preparation: direct and indirect.
• The direct method determines changes in cash receipts and payments. The indirect method takes the net income generated in a period and adds or subtracts changes in the asset and liability accounts to determine the implied cash flow.
• A key component for any company are the changes in accounts receivable.
• Investing activities should include asset purchases and sales, interest paid on loans, and payments related to mergers and acquisitions.
• Negative cash flow is not always a cause for alarm; some businesses choose to spend more to meet business goals and may rely on financing to get them to positive cash flow generation.

Why Do Businesses Need Cash Flow Statements?

The cash flow statement serves as a bridge between the income statement and the balance sheet. There are four key reasons why a cash flow statement is important:

1. It reveals a business’ liquidity so that companies know just how much cash is on hand, and thus their projected runway to when cash is projected to run out.
2. It details the specific changes in assets, liabilities and equity.
3. It eliminates the effects of different bookkeeping techniques (for example cash basis versus accrual basis accounting), making it easier for investors to compare multiple firms’ financial performance.
4. It helps analyze and forecast the amount, timing and probability of future cash needs.

#1 Cloud
Accounting Software

How Cash Flow Statements Work

All publicly traded companies must file financial reports and statements with the Securities and Exchange Commission (SEC). The cash flow statement is one of three critical documents, along with the balance sheet and income statement, included in SEC filings. It provides information about cash receipts, cash payments and the net change in cash resulting from a company’s operating, investing and financing activities.

Investors look to the cash flow statement for insights into a company’s financial footing. Meanwhile, creditors can use the cash flow statement to gauge liquidity and determine whether a company can fund its operating expenses and pay off its debts.

What Is Included in a Cash Flow Statement?

A cash flow statement consists of three key components:

• Cash flow from operating activitiesNet income564MAdditions to cashDepreciation981MIncrease in accounts payable-277MSubtractions to cashIncrease in accounts receivable-9MIncrease in inventory75MNet cash from operations1.3BCash flow from investingPurchase of equipment-657MCash flow from financingNotes payable0Cash flow for month ended January 31, 2020643M

  The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows, which classifies cash flows during the period according to operating, investing, and financing activities.

  Fundamental principle in IAS 7

  All entities that prepare financial statements in conformity with IFRSs are required to present a statement of cash flows. [IAS 7.1]

  The statement of cash flows analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an entity's cash management are also included as a component of cash and cash equivalents. [IAS 7.7-8]

  What reflects cash flow from operating activities?

  Working Capital Inventories, accounts receivable (AR), tax assets, accrued revenue, and deferred revenue are common examples of assets for which a change in value is reflected in cash flow from operating activities.

  What is meant by operating investing and financing activities in cash flow statement?

  Operating activities include cash activities related to net income. Investing activities include cash activities related to noncurrent assets. Financing activities include cash activities related to noncurrent liabilities and owners' equity.

  What are some investing activities reported on the statement of cash flows?

  Items reported on a cash flow statement for investing activities include purchases of long-term assets such as property, plant, and equipment (PP&E), investments in marketable securities such as stocks and bonds, as well as acquisitions of other businesses (M&A).