| A firm’s cash flows can be divided into
cash flow from: (1) operating activities (2) investment activities, and (3)
financing activities. The operation activity cash flows are cash flows--inflows
and outflows--directly related to origination and sale of the financial firm's
assets and to operating costs such as general market activities, security
trading activities, interest received and foreclosed collateral. Investment
activity cash flows are cash flows and financial investments. Clearly, purchase
transactions would result in cash outflows whereas sales transaction would
generate cash inflows. The financing activity cash flows result from debt and
equity financing transactions. Borrowing and repaying either short - term
debt or long - term debt would result in a corresponding cash inflow or outflow.
Similarly, the sale of common or preferred stock would result in a cash inflow
whereas the repurchase of stock or payment of cash dividends would result in a
financing outflow. Summarizing the firm's operating, investment, and financing
activity cash flows during a given period helps to account for changes in the
firm's cash position from the beginning to the end of the period
chosen. Managing cash is a very important activity for financial intermediaries. The cash flow statement provides the basics structure of all sources and uses of cash. |