Question

When it comes to the Statement of Cash Flow. Why is it important to identify the three cash flows (operating, financing & investing) seperately?

Answer 1

Answer

Operation, Financing and investing are the three major operations of any business entity hence cash flow is prepared in three parts to understand the flow of cash due to different activities.

Cash flow from operations tells us how much cash is generated by operations where as Investing activities deals with investments of the company which shows the potential of the company to invest or to expand its operations. Financing activities shows the cash flow due to loans, issue or redemptions of shares and securities.

Cash generated from Operations are not the same as cash generated from investing activities because cash Investing from investing activities are not regular in nature. Similarly cash from financing activities is different from other two activities. In short cash generated from different activities reflects a different prospect of the entity.

Investors are pleased if high cash is due to Operations instead of issue of debt instruments.

Generally companies tend to generate cash from operations and spends its cash in investments. High cash used in investing activities tell that a company is growing and creating new ways to expand its business and operations.

To conclude every entity generates cash in three different ways which are separately shown in Cash Flow statement.