Cash flow data supplements the information provided by the income statement as
well as linking consecutive balance sheets. The statement of cash flows is intended to
report all the cash inflows and outflows (classified among operating, investing,
and financing activities) of the firm for a specified period. It also provides
disclosures about that period’s non cash investing and financing activities.
The classification of cash
flows among operating, financing, and investing activities is essential to the
analysis of cash flow data. Net cash flow (the change in cash and equivalents
during the period) has little informational content by itself; it is the
classification and individual components that are informative. See exhibit 3 for
a sample cash flow statement.
Exhibit 3
XYZ
Company
Cash
Flow Statement Year Ended December 31, 2003
Saudi
Riyals
Cash Flow from Operating
Activities
Net Income
46,500
Add (subtract) adjustment
Depreciation
1,000
Deferred Taxes
500
Gain on the Sale of Machinery
(400)
Account Receivable
(6,000)
Inventory
2,000
Accounts Payable
3,000
Net Cash Flow from Operations
46,600
Cash Flow from Investing
Activities
Purchase Fixed Assets
(10,000)
Sale of old machine
2,000
Net Cash Flow from Investing
(8,000)
Cash Flow from Financing
Activities
Increase in Long-term Loan
4,000
Sale of Common Stock
500
Dividend Paid
(6,000)
Payment of Mortgage Note
(2,500)
Net Cash Flow from Financing
(4,000)
Net Increase (Decrease) in
Cash & Cash Equivalents
34,600
Cash & Cash Equivalents at
Beginning of Year
10,000
Cash & Cash Equivalents at
Year-End
44,600
Cash Flow from Operating Activities(cash from operations or
CFO) measures the amount of cash generated or used by the firm as a
result of its production and sales of goods and services. Although deficits or
negative cash flows from operations are expected in some circumstances (e.g.,
rapid growth), for most firms positive operating cash flows are essential for
long-run survival. Internally generated funds can be used to pay dividends or
repurchase equity, repay loans, replace existing capacity, or invest in
acquisitions and growth.
Cash Flow from Investing Activities(cash from investing or
CFI) reports the amount of cash used to acquire assets such as plant and
equipment as well as investments and entire businesses. These outlays are
necessary to maintain a firm’s current operating capacity and to provide
capacity for future growth. CFI also includes cash received from the sale or
disposal of assets or segment of the business.
Cash Flow
from Financing Activities(cash from financing CFF) includes cash flows related to the
firm’s capital structure (debt and equity), including proceeds from the issuance
of equity, returns to shareholders in the form of dividends and repurchase of
equity, and the incurrence and repayment of debt.
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