How To Calculate Cash Flow And Analyze The Results

how to calculate cash flowHow to Calculate Cash Flow

Cash flow is the movement of money into and out of a company, and it can be affected by several non-cash transactions. The cash flow statement is a report of the cash received and used by the operating, investing, and financing activities of a company during an accounting period. It explains the changes during the period in cash and cash equivalents including demand deposits and short-term highly liquid investments that can be quickly converted to cash. A cash flow analysis helps to maintain operations and make investment decisions. Some of the activities in each of the three sections of the cash flow statement are shown here:

  1. Operations
  • Cash inflows consist of cash received directly from the customers, interest income and dividends earned.
  • Cash outflows consist of the money paid to employees and suppliers, interest payments, payment of income taxes and any other operating cash payments.
  1. Investment
  • Cash inflow basically means a combination of loans, cash proceeds from bonds and stocks equity sales and cash received from assets or sales of physical property such as musical instruments and devices.
  • We talk about cash outflow when one pays in cash to acquire debt, get assets or physical property (for example musical instruments or devices) and buy some equity instruments.
  1. Finances
  • Cash inflow is all about cash proceeds from the sale stocks, cash received from money borrowing, cash from investment income and contributions.
  • Cash outflow means paying towards principal on debt, purchasing the stock shares back or reacquiring equity and, of course, dividend payments to shareholders

How to Calculate Cash Flow for Different Purposes

There are many different ways how to calculate cash flow and different reasons for each. Some of the different ways how to calculate cash flow include:

  • Current ratio = Current assets/Current liabilities – Shows a company’s short-term debt payment ability
  • Cash flow from operations = (Net income + non-cash changes) + cash inflows from operations activities – cash outflows from operations activities
  • Cash flow from investing = Cash inflow from investing activities – cash outflow from investing activities
  • Cash flow from financing = Cash inflow from financing activities – cash outflow from financing activities

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How To Calculate Cash Flow And Analyze The Results
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