Cash Flows

Operating, Investing, and Financing Cash Flows


This week, my study was mainly based on what cash flow statements are and what they consist of. The format of the Statement of Cash Flows is as follows: Net cash from operating activities + net cash from investing activities + net cash from financing activities = Net change in cash balance. On a cash flow statement, non-cash transactions are listed on the bottom below the cash transactions, and interest and taxes paid in cash also have to be recorded on the cash flow statements.


Operating activities are the most fundamental cash transactions of the company that include the transactions related to providing the customer the goods or services the company provides, and the costs that result from generating revenue for the company. However, the operating activities part of the Cash Flow Equation excludes the depreciation of cash and inventory, and the economic gains or losses made by the company from disposing its PP&E (Property, plant and equipment).


Investing activities includes all transactions made to acquire or dispose of long term assets, such as equity purchases for other companies, selling the company’s PP&E and other intangible goods, and selling the equity of the company.


Financing activities are transactions that are related to the creditors and the owners of the company, excluding the interest payments that the company is required to perform. Some examples of financing activity cash inflow would be issuing new stocks, reissuing treasury stocks and borrowing money from banks. Some of the outflow examples are dividend payments, buying treasury stocks, and paying off debt.


The three types of cash flow fluctuate and deviate differently depending on the maturity of the company. In the early stages of a firm, the Investing cash flow and the Financing cash flow are very large numbers, while the operating cash flow has a very small impact on the net cash flow. In the early growth period of the firm, the financing cash flow decreases dramatically which operating and investing cash flows increase and operating cash flow starts to make profits for the company. At the mature stage, where the company is now settled in the industry and making a reasonable amount of profits, the operating cash flow is high, with the investing cash flow being lower than it used to be, and the financing cash flow start going negative for the first time, since the dividends that need to be paid are much higher with the company at the mature stage.


Below are some quiz questions that I have devised from this topic, and next week,

I’ll talk more about how these statements are written and the system of Ratio Analysis.


Quiz Questions:

  1. Write the Statement of Cash Flow equation.
  2. What are operating activities, investing activities and financing activities?
  3. Which things are excluded from the Operating activities?
  4. How do the Operating, Investing and Financing Cash Flows variate depending on the maturity of the company?

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