Cash Flow Statement

Introduction

A cash flow statement is a financial statement that summarizes the cash inflows and outflows of an entity over a period of time. It shows how much money the entity has generated from its operations, how much money it has spent on its operations, and how much money it has generated from investing and financing activities.

The basic structure of a cash flow statement

A cash flow statement has three main parts: operating cash flows, investing cash flows, and financing cash flows. Operating cash flows are the cash inflows and outflows that are generated from the entity’s core business activities. Investing cash flows are the cash inflows and outflows that are generated from the entity’s investment activities. Financing cash flows are the cash inflows and outflows that are generated from the entity’s financing activities.

The format of a cash flow statement

A cash flow statement is typically presented in a horizontal format. Operating cash flows are listed first, followed by investing cash flows and financing cash flows. The total cash inflows and outflows for the period are summarized at the bottom of the cash flow statement.

Multiple choice questions:

1. Which of the following is not a cash inflow?
   • Cash received from customers
   • Cash received from interest
   • Cash received from the sale of assets
   • Cash received from the issuance of shares
   • The answer is Cash received from interest. Cash received from interest is an operating cash inflow, not a financing cash inflow. Financing cash inflows are generated from the entity’s financing activities, such as the issuance of shares or the borrowing of money.
2. Which of the following is not a cash outflow?
   • Cash paid to suppliers
   • Cash paid to employees
   • Cash paid for taxes
   • Cash paid for dividends
   • The answer is Cash paid for taxes. Cash paid for taxes is an operating cash outflow, not a financing cash outflow. Financing cash outflows are generated from the entity’s financing activities, such as the repayment of debt or the repurchase of shares.
3. Which of the following is not a component of net cash flow from operating activities?
   • Cash received from customers
   • Cash paid to suppliers
   • Cash paid for taxes
   • Cash paid for dividends
   • The answer is Cash paid for dividends. Cash paid for dividends is a financing cash outflow, not a component of net cash flow from operating activities. Net cash flow from operating activities is a measure of the cash that the entity generates from its core business activities.
4. What is the purpose of a cash flow statement?
   • To summarize the cash inflows and outflows of an entity over a period of time
   • To show how much money the entity has made or lost over a period of time
   • To show how much money the entity owes to others
   • To show how much money the entity is worth
   • The answer is To summarize the cash inflows and outflows of an entity over a period of time. A cash flow statement is a measure of the entity’s liquidity and solvency.