Question

Describe and explain three different cash flows: operating cash flow, investment cash flow, and cash flow from financing activities. What is the relative importance of each, and what factors impact your assessment? Does it vary by industry or business maturity? Imagine that you were structuring a business from the ground up--what percentage of cash flow would you target for each of these three types?

Answer 1

Cash flow statement is a financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period.

Operating activities:- It include cash activities related to business operational activities. This section reports cash flows and outflows that stem directly from a company's main business activities. For example, cash generated from the sale of goods (revenue) and cash paid for merchandise (expense) are operating activities because revenue and expenses are included in net income.

Investing activities:- It include cash activities related to noncurrent assets.The cash flow from investing activities is the result of investment gains and losses. This section also includes cash spent on property, plant, and equipment. It includes (a) long-term investments; (b) property, plant, and equipment; and (c) the principal amount of loans made to other entities. For example, cash generated from the sale of land and cash paid for an investment in another company are included in this category.

Financing activities:- It include cash activities related to noncurrent liabilities and owners’ equity. Noncurrent liabilities and owners’ equity items include (a) the principal amount of long-term debt, (b) stock sales and repurchases, and (c) dividend payments.

cash flow statement may vary with industries. but it has only two mathod to prepaire cash flow statement i.e. direct method and indirect method.