Even after showing a loss of $124 billion in 2018, Amazon had a cash outflow of $262 billion owing to investing activities. Through financing, they raised a net $214 billion in the same year. Although they generate different types of cash flow, this interest from investors was because of the fact that Amazon’s operating activities generated $31 billion cash. There was a $78 billion increase in accounts payable and $20 billion in inventory. Analyzing the different types of cash flow statements shows why negative cash flow in Amazon’s case wasn’t considered a drawback. In fact, it was seen as a growing organization that had recently spent nearly $50 billion to acquire businesses and purchase fixed assets. Amazon’s cash flows were evidence of their future increase in net income.
Managers have to learn to analyze cash flow so that they can anticipate the long-term benefits, even if short-term gains look unlikely. Knowing the types of cash flow statements will let them analyze profits, investments and operations. They must know when to invest and when to look for investment, whether debts can be repaid with the cash flow or whether to reduce the workforce strength. Here, we’ll look at the types of activities in cash flow statement and types of cash flow.
Before we look at the types of cash flow, let’s look at the three critical parts of an organization’s financial statements.
- A balance sheet gives a quick look at an organization’s assets and liabilities
- Business profitability over a certain period is shown in the income statement
- Cash flow statement is a corporate checkbook that records an organization’s cash transactions over a certain period
All types of cash flow statement show whether or not revenues booked on the income statement are collected.
Types Of Activities In Cash Flow Statement
Cash flow statement is a summary of the cash and cash equivalents that enter and leave an organization. It’s a financial statement that represents the effectiveness of an organization in managing its cash position. The types of activities in a cash flow statement show whether a business has to generate cash to fund expenses or pay debt obligations. Let’s look at the different types of activities in cash flow statement:
- Annual costs of maintenance or recurring expenses such as rents and salaries are called operating activities
- Capital or long-term investments, acquiring assets or purchasing stocks and securities is categorized as investing activities
- Financing activities include funding and are classified as equity, dividend or debt in cash flow statements
The 3 types of cash flow are classified based on these activities. Monitoring these activities and analyzing the working capital can reveal the liquidity of a business.
Types Of Cash Flow
Businesses may incur liabilities but until the transaction occurs, payments are not recorded as cash outflow. All types of cash flow statements affect the bottom line, which reports what overall changes in cash and its equivalents have happened in an organization. The cash flow statement classifies the different types of cash flow according to sources and uses of the cash.
The 3 types of cash flow are:
Cash Flow From Operations (CFO)
Among the various types of cash flow, cash flow from operations primarily decides whether a business will be financially viable long-term or not. It’s the cash directly involved with production and sale of goods and indicates whether an organization has enough incoming funds to pay for operating expenses or not.
Cash Flow From Investing (CFI)
If we look at the different types of cash flow we’ll find that investing cash flow is probably the only cash flow that’s essential even if it’s negative. It’s the cash flow that goes towards the long-term health of a business such as investing in research and development.
Cash Flow From Financing (CFF)
When compared to the other types of cash flow statements, cash flow from financing exclusively reveals how effectively an organization manages its capital structure and represents its financial strength. It shows the cash involved in funding for debts, equity and dividends.
It’s important to know the types of cash flow to assess how much a business relies on financing, investing and operating activities to generate its cash. This assessment can be ultimately used in a financial statement to reveal whether a business can generate profit to stay in business or not. Understanding the types of cash flow will let managers sharpen their strategies by separating cash flow from profit, which is used specifically to measure the financial success of a business.
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