Cash can flow in two directions – either coming in to your business or going out. Cash coming in to your business is shown as positive amounts, whereas cash going out from your business are shown as negative amounts (usually in parentheses). “Dividends” are cash payouts to people who have bought shares in a company. “Proceeds” means cash received.

Cash Flow statement shows the flows of cash over a period of time like say a year or so and not like balance sheet which gives a snapshot as on date.

Cash Flow statement analysis is done to gauge financial health of the companies.

The statement is divided into four parts:

1) Cash flows from operating activities – Operating Cash Flow (OCF) – involves core activities of the business.

- cash receipts (cash received) from your customers, - cash paid to suppliers and employees, - dividends paid**- interest received*- interest paid- tax paid

CASH FLOWS FROM OPERATIONScash receipts 83000Cash paid (56000)Dividens received 250Interest received 500Interest paid (500)Tax paid (2450)Net OCF 24800

2) Cash flow from investing activities - Investing cash flow (ICF).

Investing (in the context of the cash flow statement) means the spending of cash on non-current assets during the period for which the cash flow statement is made.

For example,

- cash spent on purchasing computer equipment/vehicles, etc.- cash spent on a purchasing plant/machinery/equipment.- cash spent on maintenance of building purchased.

Thus, generally, ICF consists of cash outflows and hence the total of this section is usually negative. But say if you sell an asset, like say old machinery /equipment/ building(plant),

doesn’t matter profit or loss, the proceeds you receive will be treated as cash inflow under ICF for that period.

Note that: Purchases of assets are put under two different categories: additions or replacements.

Additions means purchases of additional assets in order to expand the business.Replacements do not involve expansion but rather refer to an asset being purchased to replace an old or obsolete (no longer used) asset.

CASH FLOWS FROM INVESTING ACTIVITIESAdditions to equipment/machinery (2500)Replacement of equipment/machinery (7000)Proceeds from sale of equipment 500Net ICF (9000)

3) Cash flow from financing activities - Financing Cash Flow (FCF)

Financing is the source from where the company generates or raises cash. It is where the company gets the cash from. This cash is then used to invest in non-current assets. Thus financing activities usually involves cash inflows for a business.

Financing can come from the owner (shareholder’s or owner’s equity) i.e. share capital provided to the company or from liabilities (debt/loans). i.e. Cash inflows from shareholder’s or lenders.

Now, if you repay the loan (in part or in full) for the financing originially obtained, the principal amount (NOT THE Interest Paid) paid will be considered as cash outflow under financing activities. 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. NOTE: Interest paid comes under OCF.

Similarly, dividends may also be placed under this section, although it can also be placed under the operating activities section, if the business so chooses. (as seen above)

CASH FLOWS FROM FINANCING ACTIVITIESProceeds from shareholder’s capital (in this year) 3400Proceeds from Loan 16000Payment of Loan (5400)Net FCF 13000

Therefore, a dding sections 1 ,2 and 3, we get Net Cash Increase/Decrease in Cash :

Net OCF 24800Net ICF (9000)Net FCF 13000Net Cash Increase/Decrease in Cash 28000

4) The final section comprises of the net cash increase or decrease for the period and the cash balance at the beginning and end of the period.

Net Cash Increase/Decrease in Cash (for this year) 28000Cash at the beginning of the current period (i.e. end of the previous period) 2430Cash at the end of the period 31,230

NOTE: This obtain figure for “cash at the en d of the current period” will be reported as Cash or bank account in the balance sheet under Current Assets.