Cash flow statement

(1) The statement of cash flows or cash flow statement explains where cash came from and where it went. The term ‘cash’ refers not only to the currency and bank accounts, but also to cash equivalents. Cash equivalents are highly liquid short-term investments that a company can easily and quickly convert into cash, such as Treasury bills.

(2) What are typical activities affecting cash? Managers affect cash by three types of decisions: operating, financing and investing. Operating decisions are concerned with the major day-to-day activities that generate revenues and expenses. Operating activities are transactions that affect the purchase, processing, and selling of a company’s products and services.

(3) Managers make financing decisions when they decide whether to get cash or repay debt. Financing activities are a company’s transactions that obtain resources as a borrower or issuer of securities or repay creditors and owners.

(4) After raising capital, managers must decide how to invest the capital raised. Investing activities are transactions that acquire or dispose of long-lived assets. Financing and investing activities are really opposite sides of the same coin. For example, when a company issues stock for cash to an investor, the issuing company treats it as a financing activity and the investor treats it as an investing activity.

(5) The chart below shows typical operating, investing and financing activities reported in a statement of cash flow.

Cash inflows	Cash outflows
Operating activities
Collections from customers	Cash payments to suppliers
Interest and dividends collected	Cash payment to employees
	Interest and taxes paid
Investing activities
Sale of property, plant and equipment	Purchase of property, plant and equipment
Sale of securities that are not cash equivalents	Purchase of securities that are not cash equivalents
Receipt of loan repayments	Making loans
Financing activites
Borrowing cash from creditors	Repayment of amount borrowed
Issuing equity securities	Repurchase of equity shares
Issuing debt securities	Payment of dividends

►Question/Answer session:

1. What is a cash flow statement for? What does the term ‘cash’ refer to?

2. Define cash equivalents.

3. What are typical activities affecting cash?

‘PUZZLE-4’ POINT

►Which of the following financing activities increase/decrease cash:

• Increase long-term debt

• Repurchase common shares

• Pay dividends