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Basics of Stock Investing

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Cash Flow Statement

We will now discuss cash flow statements after covering income statements and balance sheets previously.

Cash Flow statement is a document that provides aggregate data regarding all cash inflows of a company from both its ongoing operations and external investment sources and all cash outflows on account of business activities and investments during a given quarter or year. 

A cash flow statement shows the cash or liquidity position of a company. 

It provides information regarding the following:

  • Company's cash receipts and cash payments during an accounting period
  • Information about the company's operating, investing and financing activities
  • An understanding of the impact of accrual accounting events on cash flows

As an analyst, one should use the cash flow statement to determine whether or not:

  • Regular operations generate enough cash to sustain the business
  • Enough cash is generated to pay off existing debts as they mature
  • The firm is likely to need additional financing
  • Unexpected obligations can be met
  • The firm can take advantage of new business opportunities as they arise

Companies generate and exhaust cash in several ways, hence, the cash flow statement is divided into three sections:

  • Cash flows from operations 
  • Cash flows from investing
  • Cash flows from financing

Cash Flows from Operating Activities:

This includes transactions from all the core or operational activities of a business. It shows how much cash comes from sales of the company's goods and services, less the amount of cash needed to produce and distribute those goods and services.

Companies that manage their working capital requirements efficiently, manage to generate positive cash from operations. This helps them to plan for Capex or Acquisitions for future wealth creation.

Example of cash flows from operating activities:

Cash Flows from Investing Activities:

This section largely reflects the amount of cash the company has spent on capital expenditures, such as new equipment or anything else needed to keep the business going. It also includes acquisitions of other businesses and monetary investments. It shows the cash flows that arise from investing gains or losses. It also provides information on changes in the company’s capital expenditure (CAPEX). If Cash Flow from Investing Activities is negative it signifies that the company is on an expansion spree & investing in the business.

Example of cash flows from investing activities:

Note: Interest received can be included under cash flows from interest activities or financing activities.

Cash Flows from Financing Activities:

This section details the cash flows associated with external financing activities. Sources of cash inflow would be cash raised by selling stock and bonds or by bank borrowings. Likewise, paying back a bank loan would show up as an outflow and so would dividend payments & common stock repurchases.

Example of cash flows from operating activities:

The above examples are discussed keeping in mind the normal business activities of a manufacturing firm.

However, for a bank the definitions would change a little. For example, in the case of a manufacturing firm, interest income is not its operating or core business income, hence it is a part of cash flow from financing activities. Nevertheless, for a bank, interest income is a part of its core business operations and hence it forms a part of cash flow from operations.

A sample Cash flow statement of Company XYZ:  

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