Kenneth R. Szulczyk
activities that cause cash inflows and outflows. Financial analysts view the cash flow statement
importantly because future business expansion impacts the cash flows over time. Furthermore, a
company could be financially healthy, but poor cash flows impose hardship on the business. For
example, if an employer cannot pay workers’ wages, then some workers quit and leave the
employer.
Table 5. Statement of Retained Earnings for Corporation XYZ
Net income $50,00
Add retained earnings, December 31, 2010 $10,000
Total $60,000
Deduct dividends declared 20,000
Retained earnings, December 31, 2011 $40,000
Table 6. Activities that Affect a Business’s Cash Flow
Cash Inflows Cash Flows
Operating Activities
Customers pay for sales in cash Pay salaries
Customers pay accounts receivables Pay expenses (in cash)
Merchandise inventory decreases
Accounts payable increases
Investing Activities
Received cash from investments Purchased securities
Sold property or equipment Purchased land
Financing Activities
Company issues more stock Company pays dividends
Company issues bonds Company retires its bonds or stocks
We show a Statement of Cash Flows in Table 7. If cash enters a business, then the cash
flow is positive. As cash leaves a business, subsequently, the cash flow is negative. Furthermore,
the cash flow statement has three sections: operating, investing, and financing activities. For
example, the business received $100,000 from customers and paid $20,000 in taxes for the
operating activities. The $100,000 is net cash received from customers, which equal total cash
sales minus merchandise returns. Then the business invested in the business by purchasing
$20,000 in new equipment for the investment activities. Finally, the business issued $50,000 in
brand new stock to expand the business and paid $30,000 in dividends for financing activities.
Consequently, the business has $110,000 in total cash at the end of the year. You can calculate
this amount by starting with the cash on hand at the beginning of the year and add the net cash
flow that the business received during the year.