Understanding a cash flow statement

<h1>Understanding a cash flow statement</h1>Author: <a title="Christina Pomoni" href="http://www.articlesbase.com/authors/christina-pomoni/120733.htm">Christina Pomoni</a> The main source of information needed to estimate the future cash flows of a firm is the financial statements, namely balance sheet, income statement and cash flow statement. Financial statements assist stakeholders in estimating the value of a firm’s assets and the required rate of return and in understanding the composition of the cash flows of a firm and what will contribute in the growth of these cash flows. Cash flow statement is a financial statement that shows the effects on the firm’s cash flow or income flows and changes in its balance sheet. Even if a firm reports a large net income during a year, it doesn’t necessarily mean that the amount of the cash flow reported in the year-end balance sheet would equal this net income. The reason is that this net income may be used to pay dividends, to increase inventories, to finance account receivables, to invest in fixed assets, to reduce debt or to buy back shares. Therefore, cash flow statement summarizes the changes in a firm’s cash position. Cash flow statement is divided in three sections: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. In order to understand how a cash flow statement works, we should first analyze what each of the three sections expresses and how this information is then integrated in the total cash flow. <ul> <li>Cash flow from Operating activities</li> </ul> This section lists the sources and uses of cash that arise from the normal operations of a firm. Normally, cash flow from operating activities includes net income, depreciation, changes in current assets and liabilities other than cash, short-term investments and short-term debt. <ul> <li>Cash flow from Investing activities</li> </ul> This section lists the sources and uses of cash that arise from the investments of a firm. A firm makes investments in own non-current and fixed assets and the equity of other firms such as its subsidiaries. Normally, cash flow from investing activities includes investments in or sales of fixed assets. <ul> <li>Cash flow from Financing activities</li> </ul> This section lists the sources and uses of cash that arise from raising cash. Normally, cash flow from financing activities includes selling short-term investments, increasing the notes payable and long-term liabilities and equity accounts such as bonds and stocks issues and dividend payments in order to buy back outstanding bonds or stocks. The total cash flow from the three sections is the net change in the cash position of the firm that should equal the difference in the cash balance between the ending and the beginning balance sheets.About the Author: A freelance writer, top MBA graduate with Finance major, passionate about business, finance, history and music; this is pretty much me in a nutshell.

I provide high quality writing services since 2005 in the field of Business & Finance, Movie Reviews, Book Reviews, Health & Fitness, Internet and Relationships. I also have a very good knowledge of Politics and History.

My advanced familiarity with financial modeling, financial statement analysis, capital budgeting and market research has helped me a lot, not only to be a successful professional, but mostly to see life under a more creative and innovative perspective. Besides, having lived for two years in Chicago, IL and Boca Raton, FL and for quite some time in Paris, France has provided me with an international aspect and has enlarged the way I see and understand life.

I currently work as a financial and investment advisor at an international financial institution. Yet, my dream is to be able to make a living as a writer.

You may find me at:
<a target="_blank" href="http://christinapomonibusiness.blogspot.com/">http://christinapomonibusiness.blogspot.com/</a> <a target="_blank" href="http://christinapomonifinance.blogspot.com/">http://christinapomonifinance.blogspot.com/</a> <a target="_blank" href="http://reviewsrevisited.blogspot.com/">http://reviewsrevisited.blogspot.com/</a> <a target="_blank" href="http://thehistoryculturevenue.blogspot.com/">http://thehistoryculturevenue.blogspot.com/</a>Article Source: <a href="http://www.articlesbase.com/">ArticlesBase.com</a> - <a href="http://www.articlesbase.com/investing-articles/understanding-a-cash-flow-statement-1438731.html" title="Understanding a cash flow statement">Understanding a cash flow statement</a>

The main source of information needed to estimate the future cash flows of a firm is the financial statements, namely balance sheet, income statement and cash flow statement. Financial statements assist stakeholders in estimating the value of a firm’s assets and the required rate of return and in understanding the composition of the cash flows of a firm and what will contribute in the growth of these cash flows.

Cash flow statement is a financial statement that shows the effects on the firm’s cash flow or income flows and changes in its balance sheet. Even if a firm reports a large net income during a year, it doesn’t necessarily mean that the amount of the cash flow reported in the year-end balance sheet would equal this net income. The reason is that this net income may be used to pay dividends, to increase inventories, to finance account receivables, to invest in fixed assets, to reduce debt or to buy back shares. Therefore, cash flow statement summarizes the changes in a firm’s cash position.

Cash flow statement is divided in three sections: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. In order to understand how a cash flow statement works, we should first analyze what each of the three sections expresses and how this information is then integrated in the total cash flow.

Cash flow from Operating activities

This section lists the sources and uses of cash that arise from the normal operations of a firm. Normally, cash flow from operating activities includes net income, depreciation, changes in current assets and liabilities other than cash, short-term investments and short-term debt.

Cash flow from Investing activities

This section lists the sources and uses of cash that arise from the investments of a firm. A firm makes investments in own non-current and fixed assets and the equity of other firms such as its subsidiaries. Normally, cash flow from investing activities includes investments in or sales of fixed assets.

Cash flow from Financing activities

This section lists the sources and uses of cash that arise from raising cash. Normally, cash flow from financing activities includes selling short-term investments, increasing the notes payable and long-term liabilities and equity accounts such as bonds and stocks issues and dividend payments in order to buy back outstanding bonds or stocks.

The total cash flow from the three sections is the net change in the cash position of the firm that should equal the difference in the cash balance between the ending and the beginning balance sheets.

A freelance writer, top MBA graduate with Finance major, passionate about business, finance, history and music; this is pretty much me in a nutshell. I provide high quality writing services since 2005 in the field of Business & Finance, Movie Reviews, Book Reviews, Health & Fitness, Internet and Relationships. I also have a very good knowledge of Politics and History. My advanced familiarity with financial modeling, financial statement analysis, capital budgeting and market research has helped me a lot, not only to be a successful professional, but mostly to see life under a more creative and innovative perspective. Besides, having lived for two years in Chicago, IL and Boca Raton, FL and for quite some time in Paris, France has provided me with an international aspect and has enlarged the way I see and understand life. I currently work as a financial and investment advisor at an international financial institution. Yet, my dream is to be able to make a living as a writer. You may find me at: http://christinapomonibusiness.blogspot.com/ http://christinapomonifinance.blogspot.com/ http://reviewsrevisited.blogspot.com/ http://thehistoryculturevenue.blogspot.com/

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