Page 276 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes 12.2.3 Statement of Cash Flow

The statement of cash flow gives information on the cash flow activities of a company. This
statement specially covers the fields of investment, operation and financing activities of the
company. The statement of cash flow shows all sources and uses of a company’s cash during the
accounting period. Sources of cash listed on the statement include revenues, long-term financing,
sales of noncurrent assets, and an increase in any current liability account or a decrease in any
current asset account. Uses of cash include operating losses, debt repayment, equipment purchases
and increases in current asset accounts.
The main items covered in the cash flow statement include:
 Cash generated from operating details the actual cash surplus raised by a company’s day-
today business. This is sometimes referred to, for short, as a company’s “cash flow.” It will
equal the company’s net after tax profit (from the income statement), adjusted for any
noncash revenues or expenses which were included on the income statement. For example,
depreciation (which is an imaginary charge deducted from revenue in the income statement)
is added back in, on this statement, as are deferred taxes, one-time non-cash charges and
provisions, and other non-cash charges. The bottom line of this section tells you how
much actual money was generated by a company’s business in the previous period.
 Cash provided by financing activities reports on any net cash that was raised by the
company from financial markets – such as new loans from banks or bondholders, or new
equity funds raised from the stock market (through new issues of the company’s shares),
less the costs associated with raising those funds. Companies usually raise new funds to
pay for new investments (such as expansion in operations, or new equipment or facilities).
One item which appears in this section with a negative sign is the regular dividend payout
to a company’s existing shareholders. Since dividends are considered to be a continuing
“cost” of previous efforts to raise money from shareholders, they are deducted here from
the sum of the company’s other financing activities.

 Cash used in investing activities describes how the company spent some of its cash on new
investments – such as investments in new equipment or buildings, acquisition of other
companies, and other investments.
The first two segments of the cash flow statement are usually positive (since they usually, but
not always, indicate how the company “raised” money). The third segment is usually negative
(since it usually, but not always, indicates that the company “spent” money on incremental
investments). The overall balance of the three sections of the cash flow statement therefore
shows whether the net effect of these three components was positive or negative. If the net
balance is positive, then the company finished the period with more cash (or highly liquid cash
alternatives) in the bank than it started with. Its cash balance (which was reported as one type of
asset on the balance sheet) grew. If the cash flow balance was negative, this means that the
company’s cash balance shrank during the period.

The bottom of the cash flow statement will usually summarise how much cash the company
started the period with, the net change in cash, and then the closing cash balance.
Researchers and analysts are often interested in the cash flow situation of companies which are
in financial distress. Even healthy companies, of course, may experience a negative change in
cash during the year – if, for example, they are expanding rapidly and therefore spending more
on new investments than they actually raise from their internal cash flow and from new financing.

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