CFS allows investors to understand how a company's operations are running,
where its money is coming from, and how it is being spent.
CFS is distinct from IS and BS because it does not include the amount of future incoming and
outgoing cash that has been recorded on credit.
Three components of CFS:
(1) Operations
* Changes in cash, accounts receivable, depreciation, inventory and accounts payable
are reflected in cash from operations
* To measure the cash inflows and outflows caused by core business operation
* The operations component of cash flow reflects how much cash is generated from
a company's products or services
(2) Investing
* Changes in equipment, asset or investment related to cash from investing
* When company investing of an assets, the transaction is considered "cash out",
because cash is used to buy new equipment or short-term assets
* When company divests of an assets, the transaction is considered "cash in"
(3) Financing
* Changes in debts, loans or dividends are accounted for in cash from financing
* When the capital is raised, changes in cash from financing are "cash in"
* When dividends are paid, they are "cash out"
* eg. If a company issues a bond to public, the company receives cash financing,
however, when interest is paid to bondholders, the company is reducing its cash.
For a company, CFS use to predict future cash flow which helps with matters in budgeting
For investors, CFS reflects a company's financial health - the more cash available for
business operation, is better.
Negative cash flow should not automatically raise a red flag without some further analysis
because sometimes a negative cash flow results from a company's growth strategy
in the form of expanding its operations.
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