Question

Explain the three categories of cash flows for a corporation and identify which source of cash is most important and why.

Answer 1

Three categories of cash flows are:-

1. Operating cash flow:- These are those cash flows which is generated due to operating activities. Operating activities are those activities which are essential to run the corporation. Example:- Cash generated from the sale of goods, cash paid to purchase the inventory.

2. Investing cash flow:- These are those cash flows which is generated due to non-current assets. Non-current assets include building, plant, and machinery, etc. Example:- Cash paid to buy the land, cash generated from the sale of the building, cash received from the sale of the car, etc.

3. Financing cash flow:-These are those cash flows which is generated due to non-current liabilities and owners' equity. Non-current liabilities and owner's equity are bonds, debentures, preference shares, equity shares, etc. Example:- Cash received from the issue of bonds, cash paid for the redemption of debentures, etc.

Operating cash flow is most important because it provides cash to run the daily operations effectively and stay in the business. Without operating cash, the business will fail.

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