Cash Flows

Cash Flows

Jun 11, 2020 Bookkeeping 101 by ann

The same is true for cash flow from creditors, which is included in cash flows from financing activities because debt is a financing activity. Operating cash flows concentrate on cash inflows and outflows related to a company’s main business activities, such as selling and purchasing inventory, providing services, and paying salaries. Any investing and financing transactions are excluded from operating cash flows section and reported separately, such as borrowing, buying capital equipment, and making dividend payments. Operating cash flow can be found on a company’s statement of cash flows, which is broken down into cash flows from operations, investing, and financing.

Operating cash flow indicates whether a company can generate sufficient positive cash flow to maintain and grow its operations, otherwise, it may require external financing for capital expansion. The company engaged in a number of financing activities during 2014 after announcing intentions to acquire other businesses. The financing activity in the cash flow statement focuses on how a firm raises capital and pays it back to investors through the capital markets.

The cash flows from the operating activities section also reflect changes in working capital. A positive change in assets from one period to the next is recorded as a cash outflow, while a positive change in liabilities is recorded as a cash inflow. Inventories, accounts receivable, tax assets, accrued revenue, and deferred revenue are common examples of assets for which a change in value will be reflected in cash flow from operating activities.


Operating cash flow, also referred to as cash flow from operating activities, is the first section presented on the cash flow statement. The net cash flow of a company is the difference between cash inflows and cash outflows. The cash flow to common and preferred stockholders indicates the ability of a company to generate cash flow from operations for distribution to its equity investors. You will need the balance sheets of two consecutive accounting periods to determine the cash flow to stockholders.

Through this section of a cash flow statement, one can learn how often (and in what amounts) a company raises capital from debt and equity sources, as well as how it pays off these items over time. Investors are interested in understanding where a company’s cash is coming from. If it’s coming from normal business operations, that’s a sign of a good investment. If the company is consistently issuing new stock or taking out debt, it might be an unattractive investment opportunity.

cash flow to stock holders

It is a measure of a company’s liquidity and its ability to meet short-term obligations, as well as fund operations of the business. The ideal position is to have more current assets than current liabilities, and thus have a positive net working capital balance. There are three primary financial statements used by analysts and investors to research a company. Each one provides information about the nature of the company’s financial performance. The cash flow statement provides an overview of the company’s sources and uses of cash.

The financial cash flow to creditors formula to find the cash flow to creditors which is the measure of the quality of the company’s income. The Cash flow is also referred as “statement of cash flows.” Use this Cash flow to debt holders equation for solving various accounting problems related to cash flows. A company’s CFF activities refer to the cash inflows and outflows resulting from the issuance of debt, the issuance of equity, dividend payments and the repurchase of existing stock. A firm’s cash flow from financing activities relates to how it works with the capital markets and investors. The common stock repurchase of $88 million, which is also on the cash flow statement we saw earlier, is broken down into a paid-in capital and accumulated earnings reduction, as well as a $1 million decrease in treasury stock.

To understand Capital Surplus on the balance sheet, you must first understand the concept of surplus. From an accounting standpoint, a surplus is a difference between the total par value of a company’s issued shares of stock, and its shareholders’ equity and proprietorship reserves.

How do you calculate cash flow to stockholders?

Cash flow to stockholders. Cash flow to stockholders is the amount of cash that a company pays out to its shareholders. This amount is the cash dividends paid during a reporting period. If dividends are paid in the form of additional stock or assets other than cash, this is not considered to be cash flow to investors.

For example, if a company pays $1 a share in dividends and it has 20 million shares outstanding, the total dividend payments are $20 million (20 million x $1). A portion of a firm’s capital surplus is derived from an increase in retained earnings, which has the effect of increasing the company’s total shareholders’ equity. Another part of the capital surplus comes from other sources, such as increasing the value of fixed assets carried on the balance sheet, the sale of stock at a premium, or the lowering of the par value on common stock. These other sources are frequently called Capital Surplus and placed on the balance sheet.

  • To summarize other linkages between a firm’s balance sheet and cash flow from financing activities, changes in long-term debt can be found on the balance sheet, as well as notes to the financial statements.

The indirect method uses changes in balance sheet accounts to modify the operating section of the cash flow statement from the accrual method to the cash method. The direct method of creating the cash flow statement uses actual cash inflows and outflows from the company’s operations, instead of accrual accounting inputs.

To summarize other linkages between a firm’s balance sheet and cash flow from financing activities, changes in long-term debt can be found on the balance sheet, as well as notes to the financial statements. Dividends paid can be calculated from taking the beginning balance of retained earnings from the balance sheet, adding net income, and subtracting out the ending value of retained earnings on the balance sheet. This equals dividends paid during the year, which is found on the cash flow statement under financing activities. Operating cash flow represents the cash impact of a company’s net income (NI) from its primary business activities.

A positive amount informs the reader that cash was received and thereby increased the company’s cash and cash equivalents. If a company is not bringing in enough money from its core business operations, they will need to find temporary sources of external funding through financing or investing. Therefore, operating cash flow is an important figure to assess the financial stability of a company’s operations. Operating cash flow (OCF) is a measure of the amount of cash generated by a company’s normal business operations.


Net income is typically the first line item in the operating activities section of the cash flow statement. This value, which measures a business’s profitability, is derived directly from the net income shown in the company’s income statement for the corresponding period. Changes to net working capital is a measure of operating cash flow (OCF) and is typically recorded on your statement of cash flows. The change in net working capital can show you if your short-term business assets are increasing or decreasing in relation to your short-term liabilities from one period to the next. The negative amount informs the reader that cash was used and thereby reduced the company’s cash and cash equivalents.


Cash flows from operating activities is a section of a company’s cash flow statement that explains the sources and uses of cash from ongoing regular business activities in a given period. This typically includes net income from the income statement, adjustments to net income, and changes in working capital. The latter is an account that is set up to alert investors that a certain part of the shareholders’ equity won’t be paid out as cashdividendssince they’re intending to use it for another purpose. Yes, cash flow to stockholders can be negative in a given year because cash flows from operations, cash flows from investing and cash flows from financing could all be negative as well. This is indicative of a company that is growing (negative cash from operations), buying assets (negative cash flows from investing) and raising capital (negative cash flows from financing).

We now offer eight Certificates of Achievement for Introductory Accounting and Bookkeeping. The certificates include Debits and Credits, Adjusting Entries, Financial Statements, Balance Sheet, Income Statement, Cash Flow Statement, Working Capital and Liquidity, and Payroll Accounting. There are 10,000 authorized shares, and of those, 2,000 shares have been issued for $50,000. At the balance sheet date, the corporation had cumulative net income after income taxes of $40,000 and had paid cumulative dividends of $12,000, resulting in retained earnings of $28,000. Net working capital measures a company’s ability to meet its current financial obligations.

It’s important to track the changes in net working capital so you can monitor your operating cash flow. Remember to exclude cash under current assets and to exclude any current portions of debt from current liabilities. For clarity and consistency, lay out the accounts in the order they appear in the balance sheet. Financing activities reported on the statement of cash flows (SCF) involve changes to the long-term liabilities, stockholders’ equity, and short-term borrowings during the period shown in the heading of SCF.

These activities also include paying cash dividends, adding or changing loans, or issuing and selling more stock. This section of the statement of cash flows measures the flow of cash between a firm and its owners and creditors. This information is on the statement of retained earnings, the shareholders’ equity section of the balance sheet and press releases announcing the dividend payments.

In Covanta’s balance sheet, the treasury stock balance declined by $1 million, demonstrating the interplay of all major financial statements. The largest line items in the cash flow from financing section are dividends paid, repurchase of common stock and proceeds from issuance of debt. Dividends paid and repurchase of common stock are uses of cash, and proceeds from the issuance of debt are a source of cash. As a mature company, Apple decided that shareholder value was maximized if cash on hand was returned to shareholders rather than used to retire debt or fund growth initiatives. Many line items in the cash flow statement do not belong in the operating activities section.

Cash flow to stockholders equals the amount of dividends paid to stockholders minus the cash raised from issuing new stock plus the amount of stock repurchased from existing stockholders. You can find these transactions in the financing activities section of your cash flow statement. For example, assume your small business pays a $10,000 dividend and issues new stock for $200,000 during the year.

When a company has a positive net working capital, it means that it has enough short-term assets to finance to pay its short-term debts and even invest in its growth. Companies can increase their net working capital by increasing their current assets and decreasing their short-term liabilities. However, an increasing or decreasing net working capital isn’t necessarily bad or good. Sometimes strategic business decisions call for an increase in short-term liabilities in the near-term. Other times, an increasing net working capital can show that more of your cash is tied up in assets that might not be as liquid.