Cash flow is the inward and outward movement of money in a business that combines income from sales and payments for expenses. These earnings and expenses occur in the form of three main categories of transactions: investing activities, operating activities and financing activities. The nature of cash flow depends on the operations targets, volume of production activities and future growth and expansion targets.
Cash Flow from Investing Activities
Investing activities are the tangible and intangible non-current assets a business acquires to enable long-term growth and expansion. Tangible non-current assets include land, buildings and equipment, while intangible assets include copyrights and research and development activities. The business experiences outward cash flow when it purchases these assets and inward cash flow when it sells the assets.
Cash Flow From Operating Activities
Operating activities are the day-to-day processes that the business undertakes to meet production targets or customer orders. The business incurs expenses in purchasing production materials and stationery as well as paying labor, electricity, telephone, water, fuel, and transportation costs, effectively generating outward cash flow. The business also earns income selling its products and/or services to various target markets, effectively generating inward cash flow.
Cash Flow From Financing Activities
The business is financed through either loans or capital contributed by the owners of the business through the purchase of shares. The acquisition of loans and the purchase of shares generate inward cash flow. Similarly, the business generates outward cash flow when repaying these loans and when the owners withdraw money from the capital or pay dividends.
IAS 7 Requirements on Cash Flow Activities
The International Accounting Standards 7 (IAS 7) requires that the presentation of periodic cash flow statements should always be based on the three categories of cash flow statements: investing activities, operating activities and financing activities. The IAS 7 further requires that the presentation should factor the historical aspect so that the closing balances in the previous period should be shown as the opening balances for the preceding period.
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