We’re now moving onto the cash flow statement. A problem faced in assessing companies is that they can be profitable but lack cash flow. Sales can be recorded but the cash only comes in after period of delay as suppliers sometimes gives customers generous credit terms. The cash flow statement is, thus, a very recent development, made compulsory in the US in 1988.
There are three main components to the cash flow statement :
a) Cash flow from Operating Activities
Measures cash obtained from direct business operations like selling of goods or services. When cash owed is paid to the business by a customer, it is recorded here.
b) Cash flow from investing activities
When you buy plant and equipment, you record the outgoing cash flow here. Companies that sell their means of production will have to record proceeds here. If dividends come from selling plant equipment, this should raise an alarm bell.
c) Cash flow