Question

In business and in every-day life, there are several activities that have an impact on the cash account. GAAP requires these categories, sources and uses to be placed within three main areas: Operating, Investing and Financing. First discuss the activities of business that have an impact on the cash account. Then describe how this knowledge may benefit decision-making.

Answer 1

Cash flow from operating activities- It includes cash flows generated from operations of business. It is calculated by adding non-cash items and impact of change in working capital to net income generated from business.

Cash flow from investing activities- It includes cash that company is using to invest in business to generate future cash flow from operations. For example- Investment in new plant and machinery.

Cash flow from financing activities- It includes cash flow generated from financing activities of the business like issuance of new capital, payment of dividend, new debt, payment of old debt etc.

Impact on decision making

Cash flow from operations shows that company is able to generate cash flow from operations to run the business. Investors do not view as good if a otherwise profitable company is unable to generate cash flow from operations.

Cash flow from investment shows that whether the company is willing to invest money in buying fixed assets. A business with high investment shows that company management is of the view that they can generate higher return than cost of capital of making investment.

Cash flow from financing activities shows how the company is financing their operations. It helps decision maker decide whether the company is able to get finance when required to run business.