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The statement of cash flow

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The statement of cash flow

The statement of cash flow refers to a financial statement that reports on the cash generation and how cash is expended during a specific period of time by the company. It contains a summary of cash and cash equivalents that have entered and left the company. It acts as a measure of how well the company has managed its money and bridges the balance sheet to the income statement giving a general expression of how money flows in and out of business. The preparation of the cash flow statement as part of the company’s financial reports is mandatory.

In its preparation, the cash flow statement has three major components, including:

  1. Operating activities – The operating activities constitute the primary -revenue-generating activities of the company and any other activity involving the movement of cash touching on the current assets or the current liabilities of the company. Such activities include receipts from the sale of goods and services, income tax payments, interest payments, salaries and wages, rent expense, payments for goods delivered, among others.
  2. Investing activities – The investing activities include the cash flows emanating from the acquisition or disposal of any long term assets of the company and any other long term investment not included in the operating activities, for instance, the purchase of new equipment, building, short term assets, disposal of fixed assets, among others.
  3. Financing activities – The financing activities include any cash flows resulting in changes in the composition and size of equity and the debts of the company, for instance, payment of dividends, stock repurchase, debt repayments, among others.

A cash flow statement can be positive or negative. Positive cash flow is an indication of a healthy business and shows that the company had the cash to finance all its activities and generated enough cash too. A negative cash flow, however, raises a red flag and may not need any further analysis.

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