Features of Cash Flow Statement

Aug 07, 2022 By Susan Kelly

The statement of cash flows is one of the most significant components of a company's financial statements; nonetheless, it is also one of the most neglected. Regardless matter how quickly a company's sales or stated profits on the income statement are expanding, that company will not be able to exist without good cash management. Without this, the company will be unable to properly ensure that it takes in more cash than it sends out the door.

When analyzing a firm's cash flow statement, it is essential to take into account each of the numerous sections that contribute to the overall change in the organization's financial position. In that case, the fact that the company has negative cash flow for a given quarter is not necessarily bad. However, most of the time, a company will have an overall negative cash flow for a given quarter.

Cash Flow from Financing Activities

In the cash flow statement, the financing activities section focuses on how a company acquires money and then returns that capital to investors via capital markets. These actions also include the payment of cash dividends, the addition of new loans, modifications to existing loans, and the sale of additional shares of stock. The flow of cash that occurs between a company and its owners, as well as its creditors, is measured in this portion of the statement of cash flows. The following are some examples of typical cash flow items that result from the financing operations of a company:

  • Obtaining cash through the sale of shares of stock or using funds to repurchase existing shares.
  • obtaining money via the sale of debt or the reduction of existing debt
  • distributing monetary payments known as dividends to shareholders
  • The money was made from the workers when they exercised their stock options.
  • Obtaining funds via selling hybrid instruments, such as convertible debt and equity-linked notes

Reasons for Financing

Investors can see a clear picture of how a firm pays for its operations by observing the financing activities. If a company needs more funding to either grow its operations or keep them running normally, it will enter the capital markets by issuing either debt or shares. The cost of capital, existing loan covenants, and financial health ratios are all important considerations to consider when choosing between debt and equity financing.

Large, established businesses with few opportunities for future expansion often conclude that the best way to maximize shareholder value is to distribute the remaining cash to existing investors in the form of dividends. In addition to paying dividends, another option for businesses that want to restore value to their shareholders is to engage in stock repurchase programs. A company can increase its future revenue and cash returns per share by purchasing its shares. If senior management believes that the open market price of the company's shares is too low, then share repurchases are an appealing option for increasing shareholder value. The senior management team of Kindred Healthcare had identified growth prospects that would need more money and had positioned the firm to capitalize on these potentials via various financing initiatives.


Companies operating in the United States must disclose their financial information using widely accepted accounting rules (GAAP). Companies based in countries other than the United States often use the International Financial Reporting Standards, sometimes known as IFRS. The following are some of the most important contrasts that can be drawn between the two standards, which may be summed up as some alternative classifications for cash flow items. Investors need to be aware of several straightforward category distinctions when reviewing and contrasting the cash flow statements of a business established in the United States with those of a company based in another country.

Understanding the Balance Sheet

Examining the cash flow statement is extraordinarily beneficial since it supplies a reconciliation of the cash amounts listed at the beginning and the conclusion of the balance sheet. Although doing this analysis may be challenging for most publicly listed firms because of the hundreds of line items that can be included in financial statements, it is essential to have a solid understanding of the theory behind it.

The portions of a company's balance sheet that pertain to stock and long-term debt are often where the cash flow from a company's financing operations may be found. The consolidated statement of equity is one of the finest areas to see the changes in the financing section due to the cash flow section. The following is a breakdown of Covanta Holding Corporation's financial performance in 2011:

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