Question

What kinds of activities are reported in each of the operating, investing and financing sections of the statement of cash flows? How is this information useful?

Answer 1

Activities reported in operating section of statement of cash flows;

Followings are the main activities that are reported in operating section of statement of cash flows;

·        Receipts from customers

·        Amount paid to suppliers

·        Amount paid to employees as salaries and wages

·        Cash paid for other operating expenses

·        Interest payment

·        Income tax payment

·        Recording of changes in current assets and current liabilities

·        Adjustment for non-operating items such as (depreciation, gain or loss on sale of assets etc.)

Activities reported in investing section of statement of cash flows;

Followings are the main activities that are reported in investing section of statement of cash flows;

·        Amount received from sale of equipment

·        Amount received from sale of land

·        Amount received from sale of plant

·        Amount received from sale of machinery

·        Purchase of equipment, land, plant, machine.

·        Additions and replacement of long-term assets etc.

Activities reported in financing section of statement of cash flows;

Followings are the main activities that are reported in financing section of statement of cash flows;

·        Amount received from issue of shares

·        Amount received from issue of bonds and debentures

·        Loan taken from banks & financial institutions

·        Payment of loans

·        Redemption of bonds and debentures

·        Buy back of shares

·        Payment of dividends etc.

Items shown in the statement of cash flows are very helpful for an organization and stakeholders as well because an organization can easily identify the sources and uses of cash. And on the basis of identification of sources and usage an organization can formulate proper financial policies for future time.

Apart from this various stakeholders also can understand strengths and weakness of the organization because it is quite possible that an organization is earning sufficient profits but suffering with shortage of liquidity. That is why statement of cash flows is very helpful tool in knowing about the liquidity of the company & firm.

Thus overall it is clear that statement of cash flows is very important tool in understanding liquidity of the organization in much better way.