This section explains how the statement of cash flows presents the change in cash for a period by categorizing cash flows into operating, investing, and financing activities.
The statement of cash flows provides detailed information about the cash receipts and cash payments of a company over a specific period. It is designed to help users assess the company’s ability to generate cash, meet its obligations, pay dividends, and understand the reasons for differences between net income and net cash flows from operating activities.
Operating Activities: These are the cash flows related to the primary operations of the company, such as cash received from customers and cash paid to suppliers and employees. This category reflects the company’s ability to generate sufficient cash from its core business activities.
Investing Activities: This section covers cash flows related to the purchase and sale of long-term assets and investments, such as equipment or securities. Cash payments to acquire investments and receipts from the sale of investments are examples of investing activities.
Financing Activities: These cash flows result from transactions related to the company’s equity and debt, such as borrowing, repaying debt, and issuing stock. It reflects how a company finances its operations and growth through external sources.
The statement of cash flows helps in understanding how a company manages its cash resources, highlighting whether it can generate enough cash from operations to fund its investing and financing activities. It also provides insight into a company’s financial strategy and its sustainability by showing whether a company relies on cash generated from operations or external financing.