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Cash Flow Analysis

Thursday, September 6, 2012
Cash Flow Analysis

Firstly, we should analyse the structure of cash flow statement.

It can be classified into: operating, investing and financing. The operating activities shows it is sufficient to repay the debt, pay dividends and invest or not without the external funds. It represents the net increase of decrease in cash form the operations. The investing activities includes: that paid and received for property, plant and equipment and other non-current assets, interest and dividends received on investments. The financing activities comprise receipts or repayments of principal from or to external providers of finance.

Here we need to learn the direct and indirect method of cash flow. The direct and indirect method from operating activities can be used to prepare the cash flow statement, the direct and indirect method have their advantages and disadvantages.
The advantage of the direct method is that it shows operating receipts and payments. The disadvantage is the significant cost that there may be in preparing the information. The advantage of the indirect method is that it highlights the differences between reported profit and net cash flow from operating activities. The disadvantage is the lack of information on the significant elements of trading.
Through the investing activities, you can know the resources transferred in order to obtain the earning in the future and cash flow, and the cash inflows arising from the resources transferred previously.

The financing activities can help the investors and creditors estimate the claim for the cash flow of the company in the future, and the price to obtain the cash inflows previously.