Key Elements of Cash Flow and Interpretation

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Next, on the changes of working capital components that includes the increase and decrease of 1) noncash current assets such as receivables and inventories and 2) current liabilities such as payables and wages payable. When there is an increase in noncash current assets would result in less cash flow from operations. Hence it is required to be deducted and vice versa when there is a decrease. While an increase in the current liabilities would result in more cash flow from operations. Hence it is required to be added back in the cash flow statement and vise versa when there is a decrease. After all these, amount for cash from operations is calculated.

Secondly is investing activities which include purchase or sales of plant assets, and loans made to and collected from other parties. The purchase of fixed assets is also called capital expenditure. Cash is paid to purchase property, plant & equipment hence it is deducted in cash flow while when cash is received from the disposal, it is added. Capital expenditures are considered necessary to maintain a company's competitive position and operating efficiency. Other elements is interest and dividend received which is the reward for investment. There will be tax shelter on interest, which is a legal method of minimising or decreasing investor’s taxable income. After adding up, the remaining will be cash flow before financing.

Third is financing activities includes borrowing and repayments of borrowings, sales of shares of stock, and payment of dividend. For some companies the cash inflow from operating activities may be insufficient to cover all the investment requirements for capital expenditure and acquisitions, so more finance has to be raised from external sources. They are equity and debt financing. Cash inflow is gained but due to dividend is to be given as a reward to equity holders to invest in company, there's an outflow. Company raise fund by selling bonds, bills or notes to investor in debt financing. In return for lending the money, the investor become creditors and receive a promise that the principal and interest on the debt will be repaid. The net increase/(decrease) in cash and cash equivalents is the change in cash and financial assets; which is the remaining cash flow available for the company after using the fund on operating, investing and financing activities.

In conclusion, it is vital to understand the elements in cash flow statements. Any mismanagement and poor decisions may cause the company to suffer cash flow problem. Cash flow statement helps company to anticipate and plan for revenue shortfalls which enable the company to exercise in foresight. However, unpredictable events and circumstances may happen which result company suffer losses even though there is detailed preparing cash flow statement. Competitors enter the market, prices of materials rise and essential equipment breaks. Thus, cash flow statement is simply a planning tool and it may not represent actual situations as they unfold through understanding.