Cash Flow Statement

The Cash Flow Statement summarises a company's cash inflows and outflows. The statement breaks down the cash flows into operating, investing, and financing activities. From a Cash Flow Statement, you would be able to know how able the company is to pay its Bills and the ability to generate Cash. It is also known as the “ Statement of Cash Flows”.

Here is an example of a Cash Flow Statement from the Annual Report Of Reliance Industries

In the above Cash Flow Statement, you can see the Business activities are divided into three activities; let’s discuss them one by one.

Cash Flow from Operating Activity

A company with positive cash flow from operating activity signifies the financial strength of the company. These activities are mostly related to the company’s business operations like production, sales, advertising, services, income tax payments, Finance costs or interest payments etc.

If you see the above image of RIL, you will see that most things are self-explanatory. The Bracket figures show the balance deduction from the above figure.

Cash Flow from Investing Activity

Investing activities are done from Company’s cash to get benefits later. The investing activity includes the purchase or sale of Assets, which can be both tangible and intangible, investment into subsidiaries(if any), and investment into financial Assets like equities, Loans given/Repaid etc.

A company’s healthy investments signify the company’s will for business expansion. A company having expansions generally results in the growth of Revenues.

Cash Flow from Financing Activity

This includes the financial transactions between the company and sources of funds from investors and banks, and the cash paid to Shareholders.

Examples:- Net Borrowings, Proceeds and Repayment of borrowings,  Dividends paid, and raising Debts.

Net Cash flows or the Net increase or decrease in cash and cash equivalents can be defined as follows.

Net increase or decrease in cash and cash equivalents= Cash Flow from Operating Activity + Cash Flow from Investing Activity + Cash Flow from Financing Activity

This figure is added to the Opening balance of Cash and Cash Equivalents(carried from the previous year) to get the Closing balance of Cash and Cash Equivalents. The closing balance of Cash and Cash equivalents is the balance that is transferred to the next year, which means how much cash the company has in its Bank accounts.

A positive cash flow is a good sign but a negative cash flow can not be considered as bad always because it may be a case where the business is expanding a lot.