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There are three major categories/sections of the statement of cash flows. Is it possible that it...

Question:

There are three major categories/sections of the statement of cash flows. Is it possible that it could considered favorable that a company has a net negative cash flow in one or more of the sections? Provide research/examples to support your position.

Cash Flow Statement:

There are three primary financial statements in the annual report. They are the balance sheet, income statement and cash flow statement. The cash flow statement provides support for the other two statements by providing a reconciliation between cash and non-cash transactions. The three sections of the cash flow statement are: cash flows from operations, cash flows from investing and cash flow from financing.

Answer and Explanation:

There are two sections in the cash flow statement that could be considered favorable if they had a net negative cash flow: cash flow from investing activities and cash flow from financing activities.

If the company has a negative balance in the first section, cash flow from operating activities, it is considered unfavorable because the company isn't generating enough cash to support operations.

However, if the company has a negative balance in the second section, cash flow from investing activities, it is considered favorable. It means the company sold an asset that resulted in positive cash flows.

Likewise, if the company has a negative balance in the third section, cash flow from financing activities, it is considered favorable. It means the company has paid out cash, i.e., paid off a loan) or made a dividend payment to shareholders. These are not considered unfavorable actions.


Learn more about this topic:

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Using the Statement of Cash Flows for Decision Making

from Accounting 101: Financial Accounting

Chapter 12 / Lesson 5
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