A company must fund its operations, expand its businesses and thrive in the long term. To do so, a company relies on a corporate statement of cash flows, also referred to as liquidity report. Knowing what fuels a company's growth is important, especially for investors who purchase corporate shares with a long-term perspective.
A cash flow statement is an accounting report that tells investors how a company uses its funds. The statement provides insight into a firm's liquidity movements, shedding light on how it maintains adequate working capital levels. Working capital gauges short-term cash availability and equals current assets (cash and inventories, for example) minus current liabilities, also known as short-term debts. A company with multiple subsidiaries combines, or consolidates, the liquidity reports of all subsidiaries to create a consolidated statement of cash flows. In the statement, accountants report consolidated cash flows from operating activities, investing activities and financing activities.
A statement of cash flows is an important document that investors keep a close eye on. The report draws its significance from the fact that it provides data about a firm's solvency — that is, its ability to pay debts. To investors and financial-market players, it's important that corporate management shows that the company doesn't put all its eggs in one basket — in other words, corporate business lines diversify their investments in various economic sectors.
The first item in a consolidated statement of cash flows concerns operating activities. The section covers cash receipts and payments that relate to a company's day-to-day activities. These include payments to vendors, receipts from customers, interest expense, labor charges and other general expenses. Consolidated cash flows from operating activities also relate to interest and dividends received from other companies and income taxes paid.
Consolidated cash flows from investing activities tell the tale of a company's investment strategy in the short and long terms. The section indicates to the public and investors where a company's priorities lie. Equally important, investing activities also provide insight into economic conditions, as top executives are generally euphoric about long-term investments if the economy is on a strong footing. In the "investing activities" section, corporate accountants show purchases or sale of equipment and machinery, loans made to other companies and purchases of securities, such as stocks and bonds.
Consolidated cash flow from financing activities provide investors useful information about a company's working capital and capital structure. Capital structure refers to the various sources of financing that a company uses to fund its operations. Specifically, financing activities concern increases or decreases in loans payable, bond redemptions and dividend payments. Redeeming bonds means repaying the debt before maturity and is a common practice, especially when bond rates are higher than market rates.
Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.