Question

1. Explain how the net cash flow from financing activities could be a negative amount.

2. Explain what cash flow pattern would normally be expected in the first year of a new company.

Answer 1

1. The net cash flow from financing activities can be a negative amount due to following reasons:

· Repayment of long term borrowings

· Repayment of short term and long term notes payable

· Repayment/Redemption of bonds payable

· Purchase of treasury stocks

· Redemption of preferred stocks

· Payment of Cash dividend

2. Cash flow pattern for the first year of a new company

· The cash flow from operating activities would most probably be a negative amount due to lower revenues and higher impact of fixed operating costs. A start up would take some time to generate revenues and in initial period the fixed operating costs like salaries, rent, admin expenses, etc would be higher. Hence it will lead to cash outflow from operating activities

· The cash flow from investing activities would be an outflow due to purchase of fixed assets needed for initial set up

· The cash flow from financing activities would be an inflow like issue of common stock or funding from the investors. The funding would be needed to meet operational expenses and long term investments needed for the start up to gear up its operations.