The cash changes in the balance sheet and income statement affect the statement of cash flow. The cash flow statement can also be called a statement of cash flow.
It has three different components in which all the changes are written down. There are two methods of making a cash flow statement.
- Direct Method
- Indirect Method
The internal Accounting standards prefer the direct method for the preparation of statements of cash flow. But some organizations also use indirect methods for their cash flow statement. The cash flow statement is divided into three parts. Which are
- Cash flow from Operating Activities
- Cash flow from Investing Activities
- Cash flow from Financing Activities
Net cash flow from these activities is net up with the profit/ loss value taken from the income statement.
And at the end previous balance of cash in hand is added up to determine the ending balance of cash. This statement also verifies that the organization’s cash activities are free from errors and fraud.
Description Of Each Activity:
The operating activity is mostly made by the information gathered from the current section of the balance sheet.
It involves the changes from current receivables, current payable, and inventory. These all are sum up to get the amount of cash flow generated from operating activities.
The investment activities involve the cash inflow and outflow of cash related to investment activities that take place in the period. These may include purchasing or selling a fixed asset.
Financing Activities are generated from the changes in liabilities and capital side of the balance sheet.
The amount is positive if the activity generates cash inflow and negative when there is an outflow of cash due to the said activity.
Effect Of Negative and Positive Cash Flow:
The cash flow coming from each activity sometimes result positive and sometimes gives a negative result. It is not necessary that the outcome of cash flow from any activity must be positive.
Because it depends on the strategy of the business carried out by the management. Suppose the company acquire loans or issue shares to the market.
It results in a positive cash flow. And when a company boosts their sales by offering credit to the market or increasing their inventory level due to some reasons then it is possible that the cash flow from operating activities becomes negative.
Similarly, the case is with the investing activities. If the company make purchase some fixed assets then the cash flow from investing activities may go negative.
Is Negative Cash Flow From Investing Activities is bad?
Cash flow from investing activities is affected by the selling and purchasing of any fixed asset of the company.
When the company buys any fixed asset during the period, it affects the cash flow negatively because there is an outflow of cash from the organization.
It is absolutely very normal activity because when u look at the balance sheet. The current asset is converted to a long-term asset. The journal entry can give you more information.
For Example. A company acquire a recycling plant worth $200,000 and paid fully in cash.
The entry will be:
Plant A/c $200,000
Cash A/c $200,000
It means that there is an outflow of cash of $200,000 from the organization’s cash account.
The effect of this transaction in the cash flow statement will be like ($200,000) but by analyzing you can determine that only the company’s current asset is converted into Long term asset.
So we can say that the negative balance is very much positive in its effect. Because it gives an increase in the company’s Fixed Asset. Which is useful for the company in the long run.