CASH FLOW STATEMENT

A cash flow statement is a financial statement that provides aggregate data regarding all cash
inflows a company receives from its ongoing operations and external investment sources, as well
as all cash outflows that pay for business activities and investments during a given period. The
cash flow statement should report cash flows during the period classified by operating, investing
and financing activities. The cash flow statement is broken down into three different business
activities: operations, investing and financing.
Cash Flows from Operations
This is the first section of the cash flow statement and includes transactions from all operational
business activities. Cash flow from operating activities (CFO) is an accounting item that indicates
the amount of money a company brings in from the ongoing regular business activities, such as
manufacturing and selling goods or providing a service. Cash flow from operating activities does
not include long-term capital expenditures or investment costs, as they may be one time activities.
CFO focuses only on the core business, and is also known as operating cash flow (OCF) or net
cash from operating activities.

Cash Flow from Operating Activities = Funds from Operations + Changes in Working
Capital

Where, Funds from Operations may be calculated with any of two formulas subject to
availability of data:

1. Funds from Operations(Indirect Method)= (Net Income + Depreciation, Depletion &

Amortization + Deferred Taxes & Investment Tax Credit + Other Funds); or
2. Funds from Operations (Direct Method)= (Cash Revenue – Cash Expenses)

Cash Flows from Investing

This is the second section of the cash flow statement and can include cash spent on property, plant
and equipment. This is where analysts look to find changes in capital expenditures (CAPEX).
While positive cash flows within this section can be considered good, investors would prefer
companies that generate cash flow from business operations, not investing and financing activities.
Companies can generate cash flow within this section by selling equipment or property. Purchase
plant & equipment, cash goes out to pay for it Sell fixed assets, cash comes in from the sale.
Cash Flows from Financing
Cash flows from financing is the last section of the cash flow statement. The section provides an
overview of cash used in business financing. Analysts use the cash flows from financing section
to determine how much money the company has paid out via dividends or share buybacks. Cash
obtained or paid back from capital fundraising efforts, such as equity or debt, is listed here, as
are loans taken out or paid back. Cash inflow if we borrow money (bonds and loans) or issue stock.
Cash outflow if we pay off debt, buyback stocks or pay dividends.

SOLVED EXAMPLE