Explanation Of An Interesting Cash Flow Analysis Example

cash flow analysis exampleStudy cash flow analysis example to understand cash flow

The statement of cash flows shows how a company spends its money (cash outflows) and where its money comes from (cash inflows). Cash flow is often confused with profitability but it is not the same thing. A cash flow statement lists cash inflows and cash outflows while the income statement lists income and expenses. Many income and expense items are also cash inflows and cash outflows which helps to confuse the two. A cash flow statement shows liquidity while an income statement shows profitability. Benefits of a cash flow analysis include:

  • Identifying payment cycles or seasonal trends that may require extra cash to cover payments, making it possible to plan ahead
  • Determine when money will be borrowed as well as how much will be borrowed.
  • Identify periods of excess cash – This information can be used to direct excess cash into interest bearing assets where additional revenue can be generated or to scheduled loan payments.

Basics of cash flow analysis example

Working with a cash flow analysis example will require becoming familiar with cash flow statements.

Cash flow statements have three sections and each section relates to a particular component of a company’s business activities. The sections of a cash flow statement are:

  1. Operations – The key source of a company’s cash generation is cash flow from operations. In the operations section of the cash flow statement, net income is adjusted for non-cash charges and the increases and decreases to working capital items.
  2. Investing – In most cases, investing transactions generate cash outflows, such as capital expenditures for buildings, property and equipment, business acquisitions and the purchase of investment securities. Inflows come from the sale of assets, businesses and investment securities
  3. Financing – Debt and equity transactions are the majority of cash flow from financing as companies continuously borrow and repay debt.

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