Cash Flow Statement: A Brief Introduction: Operating, Investing and Financing activities

Cash flow statement shows the amount of cash and cash equivalents that flow in and out of a company at the end of a financial report. For example, the cash flow statement of quarter 3 indicated the amount of cash flow in last nine months (quarter 1 + quarter 2 + quarter 3).

Next, there are three sections in a cash flow statement, that are, operating cash flow, investing cash flow and financing cash flow.

1. Cash flow from operating activities
In this section, normally, what we expect to see is positive cash flow, that is, a particular company can generate CASH from its operating activities. However, sometimes the negative cash flow is acceptable once awhile in some quarters due to the fact that some receivable cash is not yet received but some payable is paid first or inventory is increased. Nevertheless, good companies should always try their best to manage their financial properly in the way that positive cash flow from operating activities is maintained annually. Examples of Cash Flow into (positive) the Operating Activities are Sale of goods or services, interest revenue, dividend; and examples of Cash flow out (negative) from the Operating Activities are Inventory purchases, payroll, taxes, interest expense etc.

2. Cash flow from investing activities
After generating CASH from operating activities, most of the companies used part of the CASH to maintain its operating activities in coming year. Therefore, normally, the cash flow from investing activities is negative, that is, CASH flow out from the company to purchase Properties, Plants and Equipment (PP&E) or acquire other businesses, for instance. The Cash flow into the investing activities includes Sale of property, plant and equipment (PP&E), Business segment, investment in equity securities etc.

3. Cash flow from financing activities
This section records financing activities such as:
Cash flow in-Issuance of own stock, Borrowing (bonds, notes, mortages etc.)
Cash flow out-Dividends to stockholders, Repaying principal amounts borrowed, repurcashing the company's own stock.
Therefore, it is good to see a negative from financing activities. That is, company has allocated their CASH for either dividend or borrowing repayment.

After having an overview of cash flow statement, we can summarise that a good company should be have a large amount of CASH that is generated from its operating activities, then use small amount of the generated CASH to reinvest its business to increase its competitive. Finally, allocating part of the remainder CASH as dividend to return to its loyal shareholders before retain them for future development.

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Written by: Xaivier Chia

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Updated: 24/12/2011
Changes: Add some examples and a related video.



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