![]() ![]() Similarly, drawings (or dividends for a corporation) may also be placed under this section, although it can also be placed under the operating activities section if the business so chooses.Īs financing activities mainly deal with cash inflows (receiving cash from shareholders or lenders), the total of this section is usually a positive for cash flow. Thus the repayment of a loan (in part or in full) falls under financing activities (as a cash outflow), as the loan served as finance for the business originally. We also include cash outflows in this section that relate to financing that we originally obtained. Thus financing activities mainly involves cash inflows for a business.įinancing can come from the owner (owners equity) or from liabilities (loans). Cash Flow from Financing ActivitiesĬash flow from financing activities is the third component.įinancing is the source of the cash that we will be using to invest in non-current assets. Replacements do not involve expansion but rather refer to an asset being purchased to replace an old or obsolete (no longer used) asset. ![]() Purchases of assets are put under two different categories: additions or replacements.Īdditions means purchases of additional assets in order to expand the business. Thus, the cash received this year from selling equipment that was originally bought (invested in) three years ago, would also be included in this section.Īs investing activities mainly deal with cash outflows (buying non-current assets), the total of this section is usually a negative. We also include cash inflows in this section relating to the sale of a non-current asset that we have already invested in. Thus investing activities mainly involves cash outflows for a business. įor example, one could be spending cash on computer equipment, on vehicles, or even on a building one purchased. Investing (in the context of the cash flow statement) means the spending of cash on non-current assets. So yes, cash really is king - in the business world and even in accounting. And the cash flow statement, which shows us what the business has been doing with its cash - provides vital information. In real life this extreme situation would rarely occur, but this example serves to explain that the cash situation of a business is key. And it could occur if additionally you weren't monitoring the cash flows of your business. It could occur if all or most of your sales have been made on credit. ![]() You may be wondering, "But how could that even occur?" Your business wouldn't survive very long in that kind of situation. The answer is that one could show the most fantastic performance according to the income statement, with huge profits, and yet have nothing remaining in the bank. ![]() Why Do We Need the Cash Flow Statement?īut why do we need the cash flow statement if we've already got the income statement? Just as it sounds, the cash flow statement is a statement (report) of flows of cash - both in and out of the business. As the business owner, you couldn't even pay yourself! Without cash, you can't pay bills, you can't expand the business by purchasing assets. And it is quite true, because cash is the lifeblood of the business. This is a common saying in the business world. ![]()
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