What are Cash Flows?

‘Cash Flows’ signifies the flow of cash in and out because of any non-cash things. Receipt of cash from a non-cash item is known as cash inflow whilst cash payment with respect to such items as cash outflow. For example, the purchase of machinery by financing cash is cash outflow while sale profits earned from the sale of machinery is cash inflow. Other instances of cash flows involve the combination of cash from trade receivables, payment to employees, payment to trade payables, interest payments, receipt of the dividend, etc.,

Types of Cash Flow:

Cashflow can be classified into 4 types. Namely:

  • Cash from Operating Activities – This is seen on the firm’s Statement of Cash Flows.
  • Free Cash Flow to Equity (FCFE) – This depicts the cash that’s accessible after reinvestment back in the trade expenditures).
  • Free Cash Flow to the Firm (FCFF) – This is a device that presumes a firm has no debt (leverage) and is utilised in financial valuation and modelling.
  • Net Change in Cash – This is seen at the bottom of the Cash Flow Statement.

Cash Flows

Also Read: What is the purpose of a Cash Flow Statement?

Uses of Cash Flow:

Cash Flow has several benefits in both operating a firm and conducting financial analysis. In fact, it’s one of the most significant parts in all of accounting and finance. The most usual benefits are:

  • Net present value (NPV)
  • The internal rate of return (IRR)
  • Cash Flow Per Share (CFPS)
  • Liquidity
  • Cash Flow Yield (CFY)

The above mentioned is the concept, that is elucidated in detail about the Cash Flows for the class 12 Commerce students. To know more, stay tuned to BYJU’S.