Cash Flow Statement

Cash Flow is indicative of a company’s financial health. Problems in cash flow may point to issues in product pricing, operating efficiency and credit policy. Statements of cash flow give an indication of what needs to be rectified and realigned.

Below is the Statement of Cash Flow of Innovative Products Inc.

Cash Flow by Activity

A business receives and distributes cash through the transactions that are carried out in its normal operations. These transactions can be categorized into three activities:

• Operating activities: Operating activities are transactions that affect the net income, or the revenues and expenses. Cash flows in from selling goods or services. Cash flows out from expenses incurred to operate the business, such as rent, wages, insurance, payments to suppliers, and buying office supplies.
• Investing activities: Investing activities are transactions that affect the assets. Cash flows in from selling land, buildings, plants, equipment, or intangible assets. Cash flows out from purchasing land, buildings, plants, equipment, or intangible assets.
• Financing activities: Financing activities are transactions that affect the owner's equity and long-term creditors. Cash flows in from borrowing cash on a short-term basis, investments made by the owner, or issuance of notes payable. Cash flows out because of the owner's withdrawals or repayment of cash loans.

How Funds Come In?

There are several categories of cash that can flow into a business:

1. Net income – This is the money the company makes from selling products and services to customers. Taxes and some basic operating expenses are deducted from this amount. This amount can be found on the company's income statement.
2. Depreciation expense – This is calculated when a company buys a fixed asset. The cost is deducted as an expense over time. However, this expense is a source of funds in the sense that the company makes back the money it spends over time as these costs are passed on to customers.
3. Bank notes – These represent short-term funding the company uses to raise money. Although this money has to be paid back, it is considered a source of funds in the short term.
4. – Increase in accounts payable means the company is taking more time to pay bills, buying products on credit, or paying higher prices for credit purchases. This money is available as cash until it is used to pay these bills.