Help With Cash Flow Statements in Accounting

The cash flow statement is very important to understand because it measures the amount of cash a company has to run the business and where the cash came from. Unlike net income, cash flow results are very hard to manipulate. Understanding the components of a cash flow statement can help a business owner or investor judge the performance and prospects of a company.

Features

• The cash flow statement is made up of three distinct parts -- operating, investing and financing. Each section displays the net cash resulting from each type of activity. The operational section of the cash flow statement shows the cash gain or loss of the core sales part of the business. The investing section shows the cash that the company has invested in the business to make it run. The financing section of the statement displays cash received from selling shares to investors or borrowing money from banks. The financing section also displays cash dispersed from making dividend payments to shareholders.

Operating Activities

• The operating activities section of the cash flow statement details what cash changes resulted from a company's core business activities. Sources of cash receipts include sales, interest earned and dividend revenue. Cash payments come from inventory purchases, wages, taxes, interest paid on loans and expenses such as rent and utilities.

  In the cash flow's operating activities section, net income, the profit left over when all costs are subtracted from a company's sales, is adjusted to eliminate non-cash charges from the income statement. Key non-cash charges include depreciation, which is a non-cash expense on assets like equipment. For example, each time a company provides financial statements, the value of each piece of equipment will decline. This is depreciation, and it reduces net income. Depreciation is not an actual cash dispersement; therefore, it is added back in the cash flow statement.

Investing Activities

• Investing activities on the cash flow statement relate to buying or selling items that belong to the business. For example, when a company buys a new factory using cash, it is an investing activity. When a company sells a building that it no longer wants, this is also an investing activity. Cash receipts can come from selling factory assets, selling a business division or collecting the principal on loans. Cash payments in this section include purchase of factory assets and making loans to other companies.

Financing Activities

• The financing section of the cash flow statement is made up of the change in cash from financing activities. Cash coming into the company comes from issuing stock or taking on debt (for example, by issuing bonds). Cash flowing out of the company can result from payment of dividends, repaying loans or repurchasing stock. For example, if a company like General Electric takes out a loan for $50 million, the money flows into General Electric and shows up in the financing activity section of the cash flow statement. If General Electric later decides to pay $20 million in dividends to its shareholders, the cash flowing out of the company also shows up on the financing activities section of the cash flow statement. The net of the $50 million coming in and the $20 million going out would be a change in cash of $30 million for GE.

Ending Cash Balance

• The key piece of information from the cash flow statement is the net ending cash figure. At the bottom of the statement, there is a "beginning cash balance" figure. The net of cash inflows and outflows from the operating, investing and financing sections is listed just below the "beginning balance." The sum of the beginning balance and the net change in cash equals the ending cash balance.

  The change in cash and the new ending cash balance figures are important because cash is the life blood of a company. According to Inc. Magazine, many companies go out of business because they lack cash, not because they lack sales or profits.