2: Financial Statement and Cash Flow Analysis
FIGurE 2.1 THE PATTERN OF CASH FLOWS THROUGH A COMPANY
(1) Operating flows
(2) Investment flows
(3) Financing flows
Payment
Payment
Depreciation
Purchase
Sale
Purchase
Sale
Borrowing
Repayment
Sale of shares
Repurchase of shares
Payment of cash dividends
Payment
Refund
Cash sales
Collection
Labour Accrued
wages
Materials
Accounts
payable
Production Overhead
Products or
services
Taxes
Operating (incl.
depreciation) and
interest expense
Sales revenue
Accounts
receivable
Debt
(short-term and
long-term)
Equity
Business
equity
Fixed assets
Cash
and
marketable
securities
2-2a THE COMPANY’S CASH FLOWS
Figure 2.1 illustrates the company’s cash flows. Note that in the process of evaluating a company’s cash
flows, analysts view cash and marketable securities as perfect substitutes. Both represent a reservoir of
liquidity that increases with cash inflows and decreases with cash outflows.
The company’s reservoir of liquidity, containing both cash and marketable securities, is affected by
changes in: (1) operating flows; (2) investment flows; and (3) financing flows.
A company’s total cash flows can conveniently be divided into: (1) operating flows; (2) investment
flows; and (3) financing flows. The operating flows are cash inflows and outflows directly related to the
production and sale of products or services. Investment flows are cash flows associated with the purchase
or sale of fixed assets. Clearly, purchases result in cash outflows, whereas sales generate cash inflows.
LO2.2
operating flows
Cash inflows and outflows
directly related to the
production and sale of a
company’s products or services
investment flows
Cash flows associated with
the purchase or sale of fixed
assets