Analyzing the Cash Flow Statement
The cash flow statement comprises of three main segments:
1. Cash flow from Operating Activities
This segment summarizes cash inflows and outflows associated to the firm’s fundamental operations. Cash flow from operating activities is calculated by adjusting net income to mirror changes in depreciation & amortization, accounts receivable, inventory, prepaid expenses, accounts payable and accruals. Increases in accounts receivable, inventory and prepaid expenses are subtracted from net income while decreases are added. Decreases in accounts payable and accruals are subtracted from net income while increases are added.
2. Cash Flow from Investing Activities
This segment summarizes cash inflows and outflows associated to the purchase and sales of non-current assets. Such activities may include the firm’s property, plant and equipment, sales of investment securities and collection of principal on loans.
3. Cash Flow from Financing Activities
This segment includes activities associated to the firm’s debt and equity financing. Such activities may consist of issuance of stocks or equity, stock repurchase, borrowing, loan repayments and dividend payments.
The net increase or decrease in the firm’s cash flow is calculated by adding the net cash flows from operating, investing and financing activities.