Cash Flow and Cash Flow Statements
In finance, cash flow refers to the amounts of cash being received and spent by a business during a defined period of time, sometimes tied to a specific project.
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Cash flow is the movement of money in and out of the business. It is commonly used in planning the funding requirement of the business, either on a short or long-term basis by ...[Continue]
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Most of the time cash flows are being used to determine gaps in the liquid position of a company. For this reason only the total amount of cash flowing in and out of a company matters. However when using cash flows as a benchmark tool (for example when calculating the internal rate of return) it is better to separate the total cash flow into separate cash flows streams.
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Basically, cash flow is composed of two components: the cash inflow and the cash outflow. You can measure cash inflow by the receipts from sales, the proceeds of share issues and assets disposal, ...[Continue]
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Another reason for separating the different types of flows is that it makes it much easier to read cash flows statements and to determine when earnings are being manipulated.
There are multiple types of flows of incoming and outgoing cash that are included in the total cash flow amount:
- Operational cash flows: Cash received or expended as a result of the companies core business activities.
- Investment cash flows: Cash received or expended by making capital expenditures (i.e the purchase of new machinery), the making investments or acquisitions.
- Financing cash flows: Cash received or expended as a result of financial activities such as receiving or paying loans, issuing stock, and paying dividends
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Basically, the profit that you get from your business is considered to be your savings and may be used to fund other things such as loans and mortgages. However, in case that you ...[Continue]
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Cash Flow Statements
A cash flow statement is a financial report that shows incoming and outgoing money during a particular period (often monthly or quarterly). The statement shows how changes in balance sheet and income accounts affected cash and cash equivalents and breaks the analysis down 'according to operating, investing', and financing activities.
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As an analytical tool the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7, is the International Accounting Standard that deals with cash flow statements.
People and groups interested in cash flow statements include:
- Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses
- Potential lenders/creditors, who want a clear picture of a company's ability to repay
- Potential investors who need to judge whether the company is financially sound
- Potential employees or contractors who need to know whether the company will be able to afford compensation
Cash flow statements are particularly important for start-up companies with limited liquid assets.
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These companies are vulnerable to devastating cash shortages, even when Accounts Receivable balances point to long-term financial health.
(Thanks to Wikipedia for this helpful cash flow guide.)
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