Question

Differentiate the cash flow from asset from the cash flow from operating activities, financing activities and investing activities. Why is it important to study the operating cash flow of a company? Illustrate your answer with example(s).

Answer 1

Cash flow from assets refer to the sum total of cash flows with regard to assets of the firm.Cash flow from operations is one among it's three constituents..The other two are change in working capital and change in fixed assets.Cashflow from operations can be computed by starting with net income and adding all non cash expenses to it.Change in working capital refers to the changes in Current Assets and Current liability items.The change in fixed assets refer to the changes to fixed assets before depreciation is factored in.

Cashflow from financing refers to the cash inflow and outflow from various financing activities .financing activities include issue of shares, issue of debt, paying dividend ,payment of interest etc.Cash flow from investing activities refer to the inflow and outflow with regard to the various investing activities like Purchase or sale of fixed assets.Purchase or sale of investments in other companies,receiving dividends and receiving interest payments.

Cashflow statement in general helps understand the reasons for change in cash position of the firm.It helps in ascertainment of liquidity,and supports the efficient management of funds.The careful analysis or study of operating cashflow is essential since it serves as an indicator of the health o the company.It also shows whether the firm will be able to meet it's core expenses like labor costs.

Example of a cashflow statement (direct Method)(using Made up figures)

Assume cash balance at beginning =$100,000

Items	Amount
Cashflow from operations
Cash recieved from customers	$150,000
Cash paid for merchandise	($14,000)
Cash Paid to employees	($8,000)
Interest paid in cash	($300)
Cash paid for income tax	($1,200)
Net Cash from operating Activities	$126,500
Cash flow from Investing Activities
Purchase of plant property and equipment	($90,000)
Net cash flow from investing activities	($90,000)
Cash flow from financing activities
Proceeds from stock issued	$70,000
Dividend paid	($25,000)
Net proceeds from financing activities	$45,000
Net increase in cash	$81,500
Beginning cash balance	$100,000
Ending cash balance	$181,500