How to calculate cash flow from investing and financing activities

Statement of cash flow is a reconciliation of the cash flows from the firm’s three sources: operating, investing and financing. Analyzing these activities is extremely important as it provides investors a reconciliation of the beginning and ending cash position on the balance sheet.

In our last article, we have discussed how to calculate cash flow from operating activities to include it to the main statement. Other two important parts are investing and financing activities.

Investing Activities – CFI

Investing activities includes cash flow due to investments in plant assets, the disposal of plant assets, acquisition of companies and subsidiaries.

Sale of plant, machinery and equity instruments of other entities are added as its a inflow to the business. Similarly purchase of plant, machinery and equity instruments of other entities substrates as it’s a outflow from business.

Financing activities – CFF

Financing activities includes cash flow due to sale or repurchase of common stock and preferred stocks and the payment of dividends. It’s basically shows the amount that comes in and goes out to fund the company.

If you repurchase common stock or pay dividend then money goes out of the business, hence you need to deduct it from the balance. Similarly, when you issue debt or equity, you have inflows. When you deduct outflows from inflows, you arrive at the net cash inflows from financing activities, which means more money is flowing into the company than flowing out.

By analyzing CFF, you can easily know how the company is funding itself. For instance, if the company is funding its business by taking debt, then it might be a sign that the company is not generating enough profit to fund its expansion. It might be a problem for the company when interest cost rise.

We suggest you to dig deeper into the numbers to find out how company will make money in future.

Here is a standard format showing how statement of cash flow is prepared :

ParticularsAmount in INR
Net incomeXXX
Increase in current assets(XX)
Increase in current liabilitiesXX
CashFlow From Operations (A)XXX
Sale of plant and machineryXX
Purchase of plant and machinery(XX)
Cash Flow from Investing Activities (B)XXX
Repurchase of common stock(XX)
Dividend on common stock(XX)
Cash Flow from financing activities (C)XXX
Increase in cash flow (A+B+C)XXX

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.