Learn how to read a cash flow statement and understand cash flow statement that enables us to extract data about the financial health of a company. Investor information helps to understand investment in a company. If you are a business owner that helps you to understand business performance and adjust key initiatives. The purpose of a these provides a picture of what happens to business cash during a specified period called the accounting period. These has three types as operating activities, investing activities, and Financing activities. The operating activities have cash flow when the company delivers regular goods and include revenue. Investing activities include cash flow from purchasing physical property real estate and patents by using free cash. The financing activities include cash flow from debt and equity financing. They are based on a statement to see how much cash different types of activities generated. They make business decisions based on your statements.
Calculation
Direct Method : It is used to calculate the operation section called a direct method based on transactional information impacted during the period.
Indirect method :The second method is used to prepare the operating section of the statement called the indirect method. The organization's transactional data are called the direct method as the accountant starts with a net income number found from the income statement. The accountant will convert net income to cash flow by de-accruing through a process of identifying non-cash expenses for a period from the income statement. The common and consistent depreciation is a reduction in the value of an asset over time, and amortization, spreading payment over multiple periods.
So when you review a financial statement you should consider it from a business perspective. The financial documents are designed to provide insight into the financial health and status of the organization. These reveal what phase a business is growing as a startup and profitable company. They will reveal whether a company is going through a transition of decline. The cash flow is depicted as being positive or negative.
Positive Cash Flow :The positive cash flow will indicate that a company has money flowing into the business over a specified period. It is ideal because having an excess of cash allows the company to reinvest in it and shareholders. The positive cash flow does not translate to profit. So your business can be profitable without being cash flow-positive and positive cash flow without making a profit.
Negative Cash Flow : Negative cash flow means your cash outflow is higher than cash inflow during a period. It is caused by a company's decision to expand the business and invest in future growth. Also important to analyze changes in cash flow from one period to another which indicates how the company is performing overall.
Importance
The cash flow statements are difficult financial documents as organizations prepare and offer valuable insight into the health of the business. To read a cash flow statement and financial document we have to increase skills.
Investing cash flows
The adjustment is made for cash flows related to investment in fixed assets and financial assets. The investing section includes cash flows from the sale and purchase of fixed assets. The sale and purchase of a stake in other companies. They have financial instruments like shares, bonds, mutual funds, and Dividends received from investments in financial instruments.
Financing cash flows
This includes a cash inflow and outflow raise and equity capital. Financing cash flow has six types, inflows raising fresh debt capital, Inflows issuing fresh equity, Outflows on account of debt repayments, Outflows on account of interest payments to creditors, Outflows on account of share repurchase, and Outflow of account of dividend payments to the shareholder.
Summary
Here we get the knowledge of the company that generates resources during the period. The sum of changes in the three categories will reflect an increase/decrease in cash and cash equal during the period. It increases/decreases when added to the cash and cash equivalent at the beginning of the period that gives me the cash. The cash flow statement is used to reveal the liquidity position of the company. They will indicate the life stage of a company growing and mature. Then understand the cash flow statement because it is the ability to generate cash flow to determine the true value of a business.
