Unit Code:

Significance of the Elements of a

Cash Flow Statement.

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Contents
Significance of each Element of the Cash Flow Statement.............................................................2
“Cash Flow from Operating Activities”......................................................................................2
“Cash Flow from Investing Activities”.......................................................................................2
“Cash Flow from Finance Activities”..........................................................................................3
The role of the statement in an Organization’s Liquidity................................................................3
The link between Liquidity and Survival........................................................................................4
References........................................................................................................................................5

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 Different Elements of a Cash Flow Statement
Significance of each Element of the Cash Flow Statement
The Cash Flow Statement plays a significant role in the business, it informs about the cash
position of the organization. The Cash flow statement displays the “sources and the uses” of the
cash of certain time. The businesses should have sufficient cash for its successful operation. The
cash is essential to pay the expenditures of the organization. The cash is also necessary to pay the
loans of the organization. The “cash flow statement” signifies the creditworthiness of the
organization, if the organization do not have enough cash to pay off all the expenses and loans,
then the organization can be declared bankrupt (Deo, 2016).
“Cash Flow from Operating Activities”
The cash flow from Operating activities is considered of great importance because it shows the
current situation of the business that how it is doing its operating activities to generate funds. The
inflow of the cash as of operating activities shows that organization is doing well and it shows
that their business is solvent (Beers, 2019). Mostly the investors and analysts see the cash that
comes or goes from operating activities in order to examine competence of the organization
(Andreas, 2017). The positive “cash flow from operating activities” indicates that organization
has the ability to pay all its expenses. That’s why it is important for the investors and creditors
(Lewellen, 2016).
Example:
Net cash flow from operating activities $
Earnings 250
Depreciation 237
Account receivable (106)
Inventory 235
Current assets (17)
Account payable (110)
Cash from operations 489

“Cash Flow from Investing Activities”

The cash that comes and goes from the investing activities indicates the upcoming development
of the organization. It shows the growth of the business revenue. If the cash outflows in investing
activities are more than the cash inflows, then it shows that the business has made long term
investment for the growth of the business. That’s why the negative cash flow of the CF of
investing activities shows that the organization is concerned for its future growth. The cash that
comes and goes from doing investing activities is important because it shows the prospect
progress of the business. The outflows in investing activities shows that the business has invested
in long term assets including the land and the building. And the inflow of the cash displays the
trade of the “assets and securities” of the business (Barth et al., 2016).

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Example:
Net cash flow from investing activities $
Property, plant & equipment (250)
Other long term assets 15
Cash from investing (235)

“Cash Flow from Finance Activities”

The cash that comes and goes from the financing activities shows the business growth and
expansion. The cash flows in financing activities indicates the monetary fitness of the
organization. The cash inflow indicates the issuance of the shares and the sale of the bonds and
the outflows shows the cash outflow to the investors and the shareholders. The outflow is in the
form of interest and dividends. The interest is paid to the bond holders and the dividend is paid to
the shareholders. The positive cash flow shows that the business has invested in the growth or
the expansion of the organization. And the negative “cash flow” displays that the business is
improving the liquidity position by paying the interest to the bondholders of the business and the
“dividend policy” of the company (Arnold et al., 2018).
Example:
Net cash flow from financing activities $
Credit line (60)
Current portion of long term debt 2
Long term debt (132)
Other long term liabilities 42
Equity (dividend) (172)
Cash from financing (320)

The role of the statement in an Organization’s Liquidity

The CFS plays a significant role in determining the “liquidity of the organization”. The “cash
flow” displays the capability of the business that it can pay off its current expenses. The business
is considered to be solvent if it has more inflows of cash then the cash outflows. Liquidity is the
ability of the organization to pay its current expenses. Every organization has to maintain certain
liquidity and if it fails to manage it then it may go bankrupt. The more there are liquid assets, the
more it is for the organization to pay its current expenses. However, the negative cash flow can
be a sign of the organization’s growth or expansion. Therefore, it is not a serious issue if the cash
flow is negative. But the “cash flow from operating activities” should be positive to pay the
current expenses and to maintain the liquidity. The working capital plays a vital role here, this
shows the cash on hand for the operating activities of the organization. And the cash flow budget
helps you to determine the expenses and to take measures for improvement of the liquidity (Oral
et al., 2015).

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The link between Liquidity and Survival
There is a link between the liquidity and the survival of the business, the certain amount of
liquidity has to be maintained by the organization in order to run their operating activities. And if
it fails to maintain that liquidity, then it fails to survive in the competitive business world. The
liquidity can be calculated by the “current ratio and the working capital” because both can show
you the ability of the businesses to pay their current expenses. If the company cannot maintain its
liquidity then it becomes unable to afford the daily expenses, to pay the utility bills and to buy
the inventory. All these are the essential activities required to run the business. If a business fails
to afford the daily expenses and to pay the utility bills, then the businesses go bankrupt and
unable to survive more. So, by seeing all the important points discussed above, this study found
that there is a strong link between the liquidity and the survival of the business.
Here, the most important thing is to differentiate the liquidity and profitability of the business.
Both are two different things and has an inverse relation. The liquidity and the profitability
cannot increase simultaneously because liquidity is maintained for the short term survival and
the profitability is for the long term survival. So, this study concludes that both the liquidity and
the profitability are significant for the “short and long term” existence of the organization
(Mohanty et al., 2018).
Example: Cash Flow Statement.
Net cash flow from operating activities $
Earnings 250
Depreciation 237
Account receivable (106)
Inventory 235
Current assets (17)
Account payable (110)
Cash from operations 489
Net cash flow from investing activities
Property, plant & equipment (204)
Other long term assets 13
Cash from investing (191)
Net cash flow from financing activities
Credit line (49)
Current portion of long term debt 2
Long term debt (122)
Other long term liabilities 32
Equity (dividend) (152)
Cash from financing (289)
Change in cash 9
Cash at start 70
Cash at end 79

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References
Deo, P. (2016). EVALUATING A CASH FLOW STATEMENT. International Journal of
Business, Accounting, & Finance, 10(1).
Lewellen, J., & Lewellen, K. (2016). Investment and cash flow: New evidence. Journal of
Financial and Quantitative Analysis, 51(4), 1135-1164.
Barth, M. E., Clinch, G., & Israeli, D. (2016). What do accruals tell us about future cash
flows?. Review of Accounting Studies, 21(3), 768-807.
Arnold, A. G., Ellis, R. B., & Krishnan, V. S. (2018). TOWARD EFFECTIVE USE OF THE
STATEMENT OF CASH FLOWS. Journal of Business and Behavioral Sciences, 30(2), 46-62.
Oral, C., & CenkAkkaya, G. (2015). Cash flow at risk: A tool for financial planning. Procedia
economics and finance, 23, 262-266.
Mohanty, B., & Mehrotra, S. (2018). Relationship between Liquidity and Profitability: An
Exploratory Study of SMEs in India. Emerging Economy Studies, 4(2), 169-181.
Beers, B. (2019). What Are Some Examples of Cash Flow From Operating Activities?.
Retrieved 30 March 2020, from https://www.investopedia.com/ask/answers/032615/what-are-
some-examples-cash-flow-operating-activities.asp
Martani, D., & Khairurizka, R. (2009). The effect of financial ratios, firm size, and cash flow
from operating activities in the interim report to the stock return. Chinese Business Review, 8(6),
44.
Andreas, A. (2017). Analysis of operating cash flow to detect real activity manipulation and its
effect on market performance. International Journal of Economics and Financial Issues, 7(1).