The rules for cash flow ? It is a list that shows the amount of cash inflows into the company from commercial operations revenues as well as outflows from it for commercial activities and investments over a given time period. The cash flows list is the third list of the main financial statements that show the company’s financial statements.
It reports on the cash generated and flowing during a specific period that may be a month, a quarter of a year, or a year, and it is necessary for the company to prepare it, as it serves as a bridge that shows the transfer of funds to and from the company, and it also presents to its users, who are investors and analysts, the financial position of the company and determines the value of its shares and what it does. commercial business and the extent of the company’s ability to generate cash, and this list appears within three main activities, which are operational, investment, and financing activities, and the sum of the cash generated by these three activities is called the net cash flow.
What are the rules for cash flows?
The statement of cash flows is based on three main rules that reflect the sources of cash flows entering and leaving the company, and these rules are:
1- Cash flow from operation activities
This is the first section of the cash flow statement, also known as net cash from operating activities, and it covers cash flow from operating activities (CFO), which includes how much money a company earns from ongoing business activities such as services provided to customers or results from selling and manufacturing products and goods, so it does not include long-term cash flows such as revenues generated from investment, and it begins with net income and then includes net cash from operating activities:
- Sales of goods and services.
- Interest payments.
- Income tax payments.
- Payments to suppliers of goods and services used in production
- Staff salaries and wages.
- Rent payments.
- Any other type of operating expenses.
2- Cash flow from investing activities
It is the cash flows that result from investment (CFI), that is, the profits and losses that the company obtains as a result of investment activities on non-current assets. It also includes cash that is spent on property, plant, and equipment because it is a long-term investment, although the higher the investment expenses, decreased cash flow However, a company whose capital expenditures are high is a company that can grow faster, and an increase in cash flow can arise from investment by selling equipment and property or collecting income from a specific investment.
Examples of investment activities include lending money and the sale of investment securities. The importance of this type of cash flow lies in the fact that it is a guide for business owners and investors to verify the source of funds entering the company and thus help in making effective decisions in financing and preserving the cash necessary for the company’s essential needs, which in turn will increase company liquidity.
3- Cash flow from financing activities
It is the last section of the cash flow statement, and it expresses the cash flowing to the company from business financing and includes transaction activities related to debts, equity, distributions, and dividends. It is a measure of the cash flow between the company and its owners and creditors.
It has capital, and it shows what has been obtained and what has been spent in property rights, loans, etc. When the cash flow from financing is positive, this indicates that there is money coming to the company, and when it is negative, it indicates that the company is paying its debts, paying distribution profits, buying back shares, and so on.
What is the importance of the statement of cash flows?
The statement of cash flows is of great importance, and the following is a statement of the most important of them:
- It helps investors anticipate future cash flows using the information contained therein and thus make their investment decisions.
- It assists in analyzing operating, investment, and financing activities.
- It helps in understanding the company’s financial position in terms of liquidity and solvency, which helps the company’s continuation and growth.
- It helps gather information about the potential to provide cash for the company’s core activities.
- Shareholders and investors can view the company’s cash flow data and compare it with that of other companies to see the quality of their profits and thus decide whether to stay in the company or not.
- Helping to determine the possibility of repaying obligations, such as long-term debts, by forecasting shareholders and investors based on cash flow data
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