Question

In: Accounting

On a monthly basis how can an external user understand a companies cash flow?

On a monthly basis how can an external user understand a companies cash flow?

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Expert Solution

Answer:

Cash flow statement simplyu means the inflow and outflow of cash. The cash flow statement is a financial report that records a company’s cash inflows and outflows at a given time. It is one of the most essential elements in the financial management of a company. Cash flow statements have three sections, each are relates to a particular component – operations, investing and financing – of a company's business activities.

Cash Flow from Operations
This is the key source of a company's cash generation. In this section of the cash flow statement, net income (income statement) is adjusted for non-cash expenses and the increases and decreases to working capital items – operating assets and liabilities in the balance sheet's current position.

Cash Flow from Investing
Investing transactions generate cash outflows, such as capital expenditures for plant, property and equipment, business acquisitions and the purchase of investment securities. Inflows come from the sale of assets, businesses and investment securities. For investors, the most important item in this category is capital expenditures.

Cash Flow from Financing
Debt and equity transactions are the major in this category. Companies continuously borrow and repay debt. Here again for investors, particularly income investors, the most important item is cash dividends paid. It's cash, not profits, that is used to pay dividends to shareholders.

Cash flow statements facilitate decision making by providing a basis for judgments.


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