The Analysis of Cash Flow

About the statement of cash flow, cash is defined as current assets available for the company, which are comprised of currency and various equivalents of such (Heakal, 2010). They can be accessed either immediately or within a short span of time, and are typically used as reserved for payments or means to avoid a downturn in an event of incidental or negative cashflows. Operating activities within the cash flow are described as a part of the company’s statement that explains where said cash comes from and what it is going to be used for within the parameters of business activities in any given period (Heakal, 2010). Operating activities include calculating net income, making adjustments to it, and performing changes in the working capital (Heakal, 2010). Additional activities involve receipts from sales, interest payments, income taxes, supplier payments, salaries to employees, rent, and other types of operating expenditures.

Investing activities include various expenditures that make the company grow in the long run. They include mergers, acquisitions, building and equipment upgrades, purchasing or selling marketing securities, and performing operations with property, real estate, and equipment (Heakal, 2010). Finally, financing activities are considered to be a section of a company’s cash flow statement (Heakal, 2010). They show the flows of cash that are used to fund various activities within the company, such as equity, dividends, and any transactions involving debt.

To understand what creditors, investors, and other users can learn from the analysis of cash flow statements, one must understand what a CFS is. In modern accounting, a CFS is a financial document that provides a summary of all cash and cash equivalents that are either entering or leaving the company as a result of its operations and transactions (Heakal, 2010). From a practical point of view, it lets others see how well a company manages its cash, how much of it is generated to pay for debt obligations, and if the existing expenditures are being met. The document is used alongside a balance sheet and an income statement, and has been used in company financial reports for the last 30 years at the very least.

Accurate CFS is a very useful tool for a potential investment. By looking at and analyzing it, it is possible to understand how the company runs its operations, where the money is coming from, and how it is usually spent (Heakal, 2010). Typically, a company that does not receive much money within the period a CFS is provided for, or spends more than it receives, is not on a solid financial footing and is, thus, not the best choice for investments. However, such predictions have exceptions, typically in seasonal industries, where CFS for low seasons are negative, but are well-compensated by income earned in high seasons.

Creditors, however, are more interested in the company’s ability to pay its debts. CFS can help with that by showing how much cash is available in the system (liquidity), and how does the company fund its operating expenses and returns the money it owes to suppliers, employees, and shareholders (Heakal, 2010). Typically, a company that is unable to properly pay its depts or meet its operating expenses would be a risky choice for a creditor. As always, there are exceptions, but in most cases, CFS provides a solid way of estimating the risks and benefits of investing or crediting a particular enterprise.


Heakal, R. (2010). What is a cash flow statement? Forbes. Web.

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