Respond to 2 students post. (2seperate responses) Original Question: describe the following terms as they relate to the statement of cash flows: cash, operating activities, investing activities, and financing activities. What can creditors, investors, and other users glean from an analysis of the statement of cash flows?
The statement of cash flow reveals how cash has flowed in and out of the company. A business owner have to be careful in how they spend the cash on hand. Maintaining a positive cash flow indicates that the company is keeping more money than it is paying out via effective handling of cash. The cash flow normally is lower on hand because of the unpaid bills and a high volume of stock that has not been sold. The statement of cash flow will reveal whether a company has a cash flow constraint which lowers cash on hand and keeps the company is a weaken state for revenue. The statement of cash flow determines how well a company is managing their cash flow through use and obtainment. Review of the cash will show exactly where money is coming and going (Epstein, 2014).
Components of Cash Flow Statement:
The statement of cash flow happens several ways starting with operating activities. Operating activities will highlight the sale of product or services and how the cash was obtained. Operating activities will also depict the money used to pay for the goods and services to run the business. Secondly, statement of cash details the investing activities to purchase stocks or to obtain funds via selling stock. Money used to make any improvements to the company are also considered investing activities. Thirdly, financing activities lets the manager know what was done to secure new stock or data behind long term debt. Dividend payments are captures in this section as well (Epstein, 2014).
What can creditors, investors, and other users glean from an analysis of the statement of cash flows?
Investor and creditors can look at the handling of the cash flow and determine the success of the company financially with raw cash. The more cash on hand to back your business is ani indicator of how a company manages their liquid assets. Liquid assets enable a company to buy quickly with less transactions and red tape. Investment of liquid assets improves the profitability of a business (Kontus & Mihanovic, 2019).
Although an income statement can tell you if the company made a profit, the cash flow statement can tell you if the company generated cash. Companies need to have enough money on hand to pay their expenses and purchase assets (Investor Publications, 2007). The cash flow statement shows managers whether the organization increased or decreased revenue or cash on hand from its activities during the statement s reporting period (Epstein, 2014). There are multiple terms in a statement of cash flow that are important for shareholders and managers to understand: cash operating activities, investing activities, and financing activities.
Cash operating activities are precisely that; it is the information that tells managers what cash the company used to pay for the goods and services needed to conduct operating activities. It helps with adjusting net income for non-cash items and adjusts for money used by other operating assets and liabilities.
The cash investing activities term means that the section provides information on whether the company used or raised money by purchasing or selling securities such as property and equipment. It also shows if the company spent cash on upgrades to significant assets or capital investments. For example, if they purchase new machinery, it must be annotated as a cash outflow from investing activities because they used cash.
The financing activities section tells managers if any transactions were made that raised cash but added long-term debt. You can find payment of dividends, stock and bond purchases or buy-backs, or debt pay-downs in this section. Another example in this section of the cash flow statement would be if the company is borrowing cash from or paying back bank loans.
Creditors, investors, and other users can extract information that will help them summarize the net cash inflows and outflows and determine how a company is raising and using most of its cash (Epstein, 2014, section 4.5) by analyzing the statement of cash flows. It will provide them with the details about cash assets laid out on a balance sheet and its relation to net income from the company s income statement.
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