Analysis of cash flow statements

Analysis of cash flow statements


Cash Flow Statement shows the movement of cash resources during the year. It gives information about sources of income and account heads on which this amount is spent.
It is an integral part of financial statements.

Cash flow statement shows, how cash was generated and how it was used during the period.

Cash flow statement is divided into three components

• Cash Flow from Operating Activities
• Cash Flow from Investing Activities
• Cash Flow from Financing Activities


CASH FLOW FROM OPERATING ACTIVITIES


Cash flow from operating activities is generally derived from the principal revenue producing activities of the business. Cash Flow from Operating Activities is the indicator of success or failure of a business’s operations. If the cash flow from operations is continuously negative, this means that the business revenue is not enough torecover the costs that are incurred to earn it. Therefore, in the long run Cash flow from operations must bepositive.

Examples of cash flows from operating activities are:

• Cash receipt from sale of goods and rendering of services.
• Cash receipts from fees, commission and other revenues.
• Cash payments to suppliers for goods and services.
• Cash payments to and on behalf of the employees.
• Cash payments or refunds of income taxes.


CASH FLOW FROM INVESTING ACTIVITIES

Cash flow from investing activities includes cash receipts and payments that arise from Fixed and Long Term assets of the organization. Cash Flows from Investing Activities shows the investment trend of the business. If it is negative (Outflow) this means that the company is investing in long term assets and is expanding. On the other hand if it ispositive (Inflow) over the years, this means that the company is selling its long term investments.

Examples of cash flows from investing activities are:

• Cash payments to acquire property plant and equipment. These also include payments made for selfconstructed assets.
• Cash receipts from sale of property plant and equipment.
• Cash payments and receipts from acquisition and disposal of other than long term assets e.g.
Shares, debentures, TFC, long term loans given etc.

If assets are held for trading purposes or in normal course of business e.g. car / property dealers and loans given by banks, then cash flow from these are included in Operating Cash Flow.


CASH FLOW FROM FINANCING ACTIVITIES

Cash flow from financing activities includes cash receipts and payments that arise from Owners of the business and other long term liabilities of the organization.
Cash Flows from Financing Activities shows the behavior of investors (both equity capital and debt capital). A positive figure (inflow) shows that funds are being invested in the company and vice versa.

Examples of cash flows from financing activities are:

• Cash received from owners i.e. share issue in case of company and capital invested by sole
proprietor or partners.
• Cash payments to owners i.e. dividend, drawings etc.
• Cash receipts and payments for other long term loans and borrowings.