Statement of Cash Flow

Lesson

The statement of cash flow is a financial report that provides information about a company's cash inflows and outflows during a specific period. It helps investors, creditors, and other stakeholders understand how a company generates and uses cash from its operating, investing, and financing activities. This report is essential for evaluating a company's liquidity, solvency, and overall financial health.

Practice Question #1

Which of the following activities would be classified as an investing activity on the statement of cash flow?

A) Payment of dividends

B) Purchase of equipment

C) Collection of accounts receivable

D) Issuance of common stock

Select an option above to see an explanation here.

A) Payment of dividends is a financing activity. B) Purchase of equipment is an investing activity. C) Collection of accounts receivable is an operating activity. D) Issuance of common stock is a financing activity.

Terms

Operating activities:: Cash flows related to a company's core business operations, such as revenues and expenses.
Investing activities:: Cash flows related to the acquisition and disposal of long-term assets, such as property, plant, and equipment.
Financing activities:: Cash flows related to a company's capital structure, such as issuing or repurchasing stock and paying dividends.
Cash inflow:: Money received by a company during a specific period.
Cash outflow:: Money paid by a company during a specific period.
Net cash flow:: The difference between cash inflows and cash outflows during a specific period.
Liquidity:: A company's ability to meet its short-term financial obligations.
Solvency:: A company's ability to meet its long-term financial obligations.
Free cash flow:: The cash generated by a company's operations that is available for distribution to its investors.
Indirect method:: A method of preparing the statement of cash flow that starts with net income and adjusts for non-cash items and changes in working capital.

Practice Question #2

What does a positive net cash flow from operating activities indicate?

A) The company is generating more cash from its core business operations than it is spending.

B) The company is investing more in long-term assets than it is receiving from their disposal.

C) The company is issuing more debt and equity than it is repaying or repurchasing.

D) The company is experiencing a net increase in its cash balance.

Select an option above to see an explanation here.

A) A positive net cash flow from operating activities indicates that the company generates more cash from its core business operations than it is spending. B) This would be related to investing activities, not operating activities. C) This would be related to financing activities, not operating activities. D) A net increase in cash balance would result from the overall net cash flow, not just from operating activities.

Do Not Confuse With

Balance sheet:: A financial report that provides a snapshot of a company's assets, liabilities, and equity at a specific point in time.
Income statement:: A financial report that shows a company's revenues, expenses, and net income over a specific period.

Practice Question #3

What is the primary purpose of the Statement of Cash Flow?

A) To report a company's financial position

B) To report a company's profitability

C) To report a company's cash inflows and outflows

D) To report a company's changes in equity

Select an option above to see an explanation here.

A) The Balance Sheet reports a company's financial position, not the Statement of Cash Flow. B) The Income Statement reports a company's profitability, not the Statement of Cash Flow. C) The Statement of Cash Flow reports a company's cash inflows and outflows, which is its primary purpose. D) The Statement of Changes in Equity reports a company's changes in equity, not the Statement of Cash Flow.

Historical Example

In the late 1990s, a large telecommunications company reported significant net income on its income statement. However, its cash flow statement revealed that the company was experiencing negative cash flow from operations. This discrepancy raised concerns about the company's financial health, ultimately contributing to its bankruptcy.