A company's statement of cash flows is broken down into three parts: operating, investing and financing. Depending on how a merger is financed, all three sections of the cash flow statement can be affected.
Financing Cash Flows
If a company uses the proceeds from a loan or stock sale to effectuate a merger, the amounts initially raised by the financing activities are recorded as increases in cash in the financing section. Usually this is recorded as proceeds from debt or stock issuance and can also include proceeds from exercise of warrants. As the various sources of financing are repaid, this is reflected in the financing section of the cash flow statement during the accounting period when it occurs.
Investing Cash Flows
Cash flows related to acquisitions and disposals of business units are reflected in the investing section of the cash flow statements. If the merger was effectuated via a stock sale, the entry generally appears as "investment in target company." If the merger involves the purchase of the target company's assets, the assets considered as long-term assets are accounted for in the investing section. Any purchases of fixed assets -- such as of property or machinery -- are also reflected as cash outflows in the investing section. However, these are only broken out from the rest of the target company's assets if the target company's purchase was structured as an asset sale.
Operating Cash Flows
Operating cash flows reconcile net earnings with actual operating cash flow by adding back non-cash expenses and accounting for changes in the balances of assets or liabilities. Changes in asset and liability balances reflect cash inflows and outflows not accounted for on the income statement. Any acquisition-related expenses, excluding stock and debt issuance costs, are expensed, which means they flow through to operating cash flows via net earnings.