Paper Example on Cash Flow Statement: Sources & Usage of Cash from Regular Biz Activities

Introduction

Cash flow from operating activities is a component of the cash flow statement explaining the sources and usage of cash from the regular business activities for a particular period. It is comprised of money arising from core activities, which a company engages in (Hand, 2017). It is also described as the difference between the revenue generated from overall sales and the cost such as sales or purchases of a product, decrease or increase of a current asset and liabilities, and depreciation expenses. Cash flow from operating activities often includes net income, adjustments, and changes to working capital. It is calculated by summing net income, non-cash items, and changes in the working capital. An example from Amazon Inc. cash flows 2017; Net income was 3,033, adjustments (Depreciation + Stock-based compensation + operating expenses – other expenses – deferred taxes) were 15,532, and Changes in working capital (Accounts payable + Accrued expense + Unearned revenues – Inventories – Accounts receivable) was 1,021. The total cash flow from operating activities was valued at 19, 586.

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Investing Activities

Total costs spent in or generated from investments at a particular period are examined in this component of the cash flow statement. Investment activities include purchases of long-term assets, business acquisitions, and marketable securities (Hand, 2017). Overall, it shows investments made by a particular company such as cash spent in capital expenditures or cash raised from the sales of long-term assets. This component of the cash flow statement indicates where a company mostly pays its cash in investment activities. Incorporating the previous example, in this case, Amazon Inc.'s cash flow from investment activities is calculated as summing up all money from the sale of the property, pay back loans, and sale from securities; and subtracts expenditures. For Amazon purchases for the end, 2017 were (11,955), Proceeds from property and equipment incentives were 1,897, Acquisitions were (13,972), Marketable securities were 9,988, and purchases of marketable securities were (13,777). The total cash flow from investing activities was (27,819). As indicated, the main usages of cash in Amazon, Inc are in purchases.

Financing Activities

The cash flow from financing activities is a component of the cash flow, indicating the net cash flows used in funding the company. On the other hand, financing activities encompass transactions involving equity, debt, and dividends (Hand, 2017). This component gives the investors highlights on the company's financial strengths and how the company's capital structure is well managed. Cash flow from financing activities is calculated as:

Cash Flow from Financing Activities (CFF) = CED – (CD + RP), where;

CED = Cash inflows from issuing debt or equity

CD = Cash paid as dividends

RP = Purchase of equity and debt

For example, a company with the following information;

Repurchase stock: 1,000

Proceeds on long-term debt: 3,000

Long-term debt payments: 500

Dividends Payments: 400

In this case, dividends payment, long-term debt payments, and repurchase stock are all cash outflow; while long-term debt proceeds are cash inflow, thus;

CFF = 3,000 – (1,000 + 500 + 400) = 1,900

Methods to Develop and Present the Statement of Cash Flow

Direct Method

The direct method of developing and presenting cash flow statements indicates the net cash from operating activities. It primarily shows the operating cash payments and receipts, such as cash received from clients, dividends, and interests acquired by the company (Kent, 2016). Cash payments include money paid to workers, suppliers, and interest paid on loans or notes payable. In the direct method, cash paid and received are presented as opposed to net income or loss in the income statements. The direct method deducts only the operating expenses, which consumed money from the cash sales because it converts all items in the income statement into a cash basis. For example, if the total sales are valued at 200,000 on an accrual basis, and accounts receivables increased by 10,000, then cash collected from clients is 190,000 (200,000 - 10,000). The direct method utilizes accrual accounting data beginning with net income from income statement with the adjustments for changes in the liabilities and assets accounts from the balance sheet. Additionally, the direct method assesses entirely the cash a company has received and the cash outflows. This method of presenting and developing a cash flow statement, also known as the income statement method, give an in-depth detail on operating cash flow accounts.

Indirect Method

On the other hand, the indirect method involves adjustments of the net income with variations in balance sheet accounts to produce an amount of cash from operating activities. It utilizes the decrease or increases in the balance sheet to modify the operating segment of the cash flow statement from accrual technique to cash technique of accounting (Kent, 2016). The method offers information on the amount of cash generated from several activities and shows the impacts of changes in the liabilities and assets accounts on an organization's cash position. For example, considering the accrual method of accounting, revenue is only recognized when earned. In case a consumer makes a $600 purchase on credit, income is known, but the cash is not yet received. In this case, debit is made in the accounts receivable, while confidence is made in the sales revenue. An increase in debit on accounts receivable is displayed in the balance sheet; hence, net income was overstated in this example on a cash basis. Therefore, a reduction would be made in net income on cash flow statements from the increase of accounts receivable of $600 due to this sale, displayed as (Increase in Accounts Receivable ($600)).

Impacts of the Components of Cash Flow Statements using the Direct Method

Operating Activities

Under the direct method, operating cash disbursement is subtracted from operating cash receipts to generate net cash flows from operating activities. Whenever the totals for operating cash receipts are higher than the totals for operating cash disbursements, the result is the net cash provided by operating activities (Niclas, 2016). On the other hand, if the inflows are higher than the outflows, the net cash will be used by the operating activities. Accordingly, if accounts receivables at the end of a financial period are higher than initially, then the company's credit sales are more compared to collections from clients, resulting in a decrease in the cash account and vice versa.

Financing Activities

Based on the direct method, financing activities indicate the amount of cash a company uses to fund its daily operations. It majorly explores equity, debts, and dividends of a company, which encompasses inflows and liquidity (Niclas, 2016). Inflows of cash are regarded as revenues earned from sales, while outflows are payments and purchases of assets. Cash inflows and outflows indicate the financial strength of a particular company. Therefore, when outflows are higher than the inflows, the company's cash decreases and vice versa.Investing Activities

The most critical component of cash flow is the investing activities because it shows a company has resources irrespective of other elements. For a company that requires investment in fixed assets, positive cash flow from investments could be a bad indicator showing the expenditure on business equipment (Niclas, 2016). Financing activities are comprised of operations that would alter the borrowing and equity of a company because it provides an account for cash utilized in the Purchase of assets for future value in the company. An increase in capital expenditures indicates that the company is investing in the planned activities, and these are reductions in the cash accounts.

Usefulness to the Analyst

Impacts of cash flow components could exhibit a variety of recommendations for any financial analyst in a particular company. When the operating activities result in a reduction in the cash accounts, then the company could run out of cash for future investments or operations, and financial analysts should consider perfect ways of financing daily activities (Justin, 2016). When financing activities result in the reduction of cash accounts, the company is spending a lot of cash in making purchases and payments. In this case, financial analysts should seek ways to cut on costs, cut stocks, or delay expansion plans. When cash accounts are reduced due to investing activities, it means the company is making future investments to improve future value.

Comparing two Statements of Cash Flow for two Different Companies

Amazon.com and Apple IncInvesting Activities

Amazon investing activities are mostly outflows, indicating that the company uses most of its cash on purchasing, buying market securities, and business acquisitions, hence outflow is higher than inflow. In this case, Amazon.com's investing activities are majorly concerned with the purchases of fixed assets; thus, it has a negative cash flow from investments (27,819) (Dichev, 2017). On the other hand, Apple Company's cash flow from investment indicates a positive cash flow because the company only invests in the Purchase of property as the fixed assets; the rest such as the sale of business and Purchase of business are non-fixed assets.

Operating Activities

A real cash account indicates that a company manages its cash well, and cash inflow is higher than cash outflows. Both Amazon.com and Apple Companies have positive cash accounts showing that cash inflow is higher than cash outflows. This also indicates that both companies have the potential to undertake future investments to improve their respective companies. It also shows that the companies could run their daily activities by paying debts with the available cash correctly.

Discussion

The two statements show that investing activities are a component of cash flow that represents the strength of accompanying because it indicates that a company majoring on fixed assets is more reliable than others. It represents the company's immediate health and the transactions from doing businesses by evaluating the potential of investment (Natalia, 2019). Cash flows from investing activities are the most significant for a company because they indicate the company's future growth in revenues. It allows organizations and business operators to take strategies in generating and maintaining sufficient cash for financing decisions. A negative cash flow such as that of Amazon indicates that the company is investing in capital assets, and the future earnings are expected to improve. It shows the company's ability to expand, launch new products, and affirm their strong financial positions. Moreover, it indicates that core organizational activities are thriving and are providing additional profitability to a particular company.

References

Dichev, I. (2017). Re-orienting the statements of cash flows around cash flows to equity holders. SSRN Electric Journal. doi: 10.2139/ssrn.3040801

Hand, J. (2017). Biases in analysts' multiplayer forecasted income statements, balance sheets, and cash flow statements. SSRN Electric Journal. doi: 10.2139/ssrn.3003267

Justin, C. (2016). Do firms still save cash out of cash flows? An updated investigation into the cash flow sensitivity of cash. SSRN Electric Journal. Doi: 10.2139/ssrn.2889130

Kent, R. (2016). Predicting operating cash flows and earnings using the direct method compared to the indirect method statements of cash flows. SSRN Electric Journal. Doi: 10.2139/ssrn.3103452

Natalia, K. (2019). Cash flow management from investing activities a...