Format of a cash flow statement

-

 Format of a cash flow statement

There are three sections in a cash flow statement: operating activities, investments, and financial activities.



Operating activities: Operating activities are those cash flow activities that either generate revenue or record the money spent on producing a product or service. Operational business activities include inventory transactions, interest payments, tax payments, wages to employees, and payments for rent. Any other form of cash flow, such as investments, debts, and dividends are not included in this section.

The operations section on the cash flow statement begins with recording net earnings, which are  obtained from the net income field on the company’s income statement. This gives an estimate of the company’s profitability. After this, it lists non-cash items involving operational activities and convert them into cash items. A business’ cash flow statement should show adequate positive cash flow for its operational activities. If it doesn’t, the business may find it difficult to manage its daily business operations.

Investment activities: The second section on the cash flow statement records the gains and losses caused due to investment in assets like property, plant, or equipment (PPE) thus reflecting overall change in the cash position for a company. When analysts want to know the company’s investment on PPE, they check for changes on a cash flow statement.

Capital expenditure (CapEx) is another important line item under investment activities. CapEx is the money which a business invests on fixed assets like buildings, vehicles or land. An increase in CapEx means the company is investing on future operations. However, it also shows that there is a decrease in company cash flow.

Sometimes a company may experience negative cash flow due to heavy investment expenditure, but this is not always an indicator of poor performance, because it may be leading to high capital growth.

Financial activities: The third section on the cash flow statement records the cash flow between the company and its owners and creditors. Financial activities include transactions involving debt, equity, and dividends. In these transactions, incoming cash is recorded when capital is raised (such as from investors or banks), and outgoing cash is recorded when dividends are paid.

Conclusion

A cash flow statement is a valuable document for a company, as it shows whether the business has enough liquid cash to pay its dues and invest in assets. You cannot interpret a company’s performance just by looking at the cash flow statement. You may need to analyse long term trends after referring to balance sheet and income statement in order to get a somewhat clear picture of how the company is faring.

Comments

Post a Comment

Popular posts from this blog

Risk of a Single Asset

-
Image
 Risk of a Single Asset: The concept of risk can be developed by first considering a single asset held in isolation. We can look at expected-return behaviors to assess risk, and statistics can be used to measure it.  Risk Assessment: Sensitivity Analysis (Scenario Analysis) and Probability Distributions can be used to assess the general level of risk embodied in a given asset. Sensitivity Analysis: Sensitivity analysis uses several possible-return estimates to obtain a sense of the variability among outcomes. One common method involves making pessimistic (worst), most likely (expected), and optimistic (best) estimates of the returns associated with a given asset. In this case, the asset’s risk can be measured by the range of returns. The range is found by subtracting the pessimistic outcome from the optimistic outcome. The greater the range, the more variability, or risk, the asset is said to have. Although the use of sensitivity analysis and the range is rather crude, it does...
Read more

Types of Corporates bonds

-
Image
Types of Corporates bonds:  There are five basic categories of corporate bonds: public utilities, transportations, industrials, banks and finance companies, and international issues. The five categories can be further broken down. For example, the transportation category includes airlines, railroads, and trucking companies. Security of bonds Security for bonds suggests some kind of underlying asset that backs up the issue. This is preferable for investors, as it provides risk protection against a potential corporate  default . Assets backing the bond provide security beyond the credit of the issuer. M ortgage bond A mortgage bond is a secured bond issued by a company. With a mortgage bond, the company pledges specific assets as a collateral for the bond. The asset securing the bond is described in detail in the mortgage deed, which is a legal document giving the bondholder a lien on an asset. A company can use a specific asset as security for more than one bond issue. In the e...
Read more

Secured Bond

-
Image
What are Secured Bonds? A secured bond is a  bond  that requires the issuer to pledge specific assets as collateral in the case of default. Secured bonds are usually more popular with businesses or governments that are less likely to be able to pay their debts in the future. Interest on these bonds isn’t enough to attract investors. Companies and local governments will less than stellar past financial track records usually need to assure inventors that they will not default on their future principle and interest payments. And if they do default, ensure the investors don’t walk away empty handed.   Example A good example of a local government that will probably need to issue secured bonds in the future is the city of Detroit. Since its 2013 bankruptcy, its difficult to believe an investor would want to put his or her money at risk purchasing a bond issued by the city of Detroit. I doubt it will ever be able to issue a bond without having some kind of secured collateral agr...
Read more

Unsecured Bonds

-
Image
What are Unsecured Bonds? Unsecured bonds or debentures are bonds that are not backed by some type of collateral. In other words, the bond is only secured by the bond issuer’s good credit standing. There are no building, equipment, vehicles, or other assets backing up the bond. If the bond issuer defaults on the unsecured bond, the bond holders could receive nothing from their investment. They would be left up to the court system to sue the bond issuer for their investment.  A bond that has no specified source of collateral is considered an unsecured debt instrument. Therefore, unsecured debt often pays higher yields than secured debt due to lack of a direct collateral coverage. There are three types of unsecured debt: debentures, Income bonds and subordinated debentures. Debentures A debenture is a type of bond that does not use collateral. It's otherwise recognized as any unsecured long-term debt. Because the bonds are unsecured, it's imperative for the issue to be profitable...
Read more

Constant-Growth Model

-
Image
Constant-Growth Model The most widely cited dividend valuation approach, the constant-growth model, assumes that dividends will grow at a constant rate, but a rate that is less than the required return. The constant-growth model is commonly called the Gordon model. The Gordon Growth Model – otherwise described as the dividend discount model – is a stock valuation method that calculates a stock’s intrinsic value. Therefore, this method disregards current market conditions. Investors can then compare companies against other industries using this simplified model. The Gordon Growth Model (GGM) is used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate. It is a popular and straightforward variant of the dividend discount model (DDM). The GGM assumes that dividends grow at a constant rate in perpetuity and solves for the present value of the infinite series of future dividends. Because the model assumes a constant growth rate, it i...
Read more