Difference Between Real Cash Flow And Money Cash Flow

  1. Difference Between Real Cash Flow And Money Cash Flow Formula
  2. Difference Between Real Cash Flow And Money Cash Flow Green Screen

Key Difference – Investing vs Financing Activities

Investing activities and financing activities consist of main two sections in the cash flow statement where the cash inflow and cash outflow from the above activities are recorded. The key difference between investing and financing activities is that investing activities record the cash inflow and outflow that result in gains and losses from investments whereas financing activities record the cash inflows and outflows that result in a change in capital structure of the company by raising new capital and repaying investors. Both these items directly affect the overall net cash position since they represent a major portion of cash amount available in the organization.

CONTENTS
1. Overview and Key Difference
2. What are Investing Activities
3. What are Financing Activities
4. Side by Side Comparison – Investing vs Financing Activities
5. Summary

Investor Income #2: Cash Flow. Cash flow is realized when you purchase an investment and hold on to it, and every month, quarter, or year that investment returns money to you. Cash-flow investors, unlike capital-gains investors, typically do not want to sell their investments because they want to keep collecting the regular income of cash flow.

What are Investing Activities?

Investing activities record the cash inflow and outflows that result in gains and losses from investments. The following items result in a cash outflow or an inflow.

Purchase of Fixed Assets

  1. As the case with other activities on the statement of cash flows depend on activities rather than actual general ledger accounts. Difference between Funds Flow Statement and Cash Flow Statement Basis of Difference. Funds Flow Statement. Cash Flow Statement. Basis of Analysis. Funds flow statement is based on broader concept i.e. Working capital.
  2. Cash flow is the actual money going in and out of your business. Profit is your net income after expenses are subtracted from sales. A business can be profitable and still not have adequate cash flow. A business can have good cash flow and still not make a profit. In the short term, many businesses struggle with either cash flow or profit.

Here the purchase price incurred is regarded as all the expenses incurred to bring the asset into working condition to generate economic benefit. Thus, this does include costs such as delivery and installation in addition to the purchase price.

Purchase of Long Term Investments

Investments generating value for more than one accounting year is included in this category. Stocks, bonds and investment in real estate are some examples for long term investments.

Sale of Fixed Assets

These are the proceeds obtained from disposing off a fixed asset.

Sale of Long Term Investment

These are the proceeds obtained from disposing off a long term investment

Cash flow from investing activities amounts to a major cash flow since fixed assets and long term investments are high in value. Thus, this is particularly important in capital intensive industries, such as manufacturing that require large investments in fixed assets.

What are Financing Activities?

Financing activities record the cash inflows and outflows that result in a change in capital structure of the company by raising new capital and repaying investors. Cash flow from financing activities shows investors the company’s financial strength.

Cash Dividends Paid

Cash dividend is the share of profits paid to shareholders for their investment. Many companies pay dividends annually while some also pay an interim dividend.

Repayment of Borrowing

Repayment is referred to as making periodic payments for borrowed funds from lenders. Such periodic payments usually include a portion of principal and interest.

Share Repurchase

If the company believes that the issued shares of the company is undervalued in the market, then the company can buy back shares. This is done in order to send a signal to the market that the company shares are more valuable than the current trading price.

Obtaining Borrowing

At times when companies face liquidity issues, borrowings can be made to obtain more finance.

Real

Issue of Shares

New shares can be issued to new investors and existing investors when the company wishes to raise new capital. Shares can be issued to both individuals and corporate bodies.

Figure 01: Format of cash flow statement

What is the difference between Investing and Financing Activities?

Investing vs Financing Activities

Investing activities record the cash inflow and outflows that result in gains and losses from investmentsFinancing activities record the cash inflows and outflows that result in a change in capital structure of the company by way raising new capital and repaying investors.
Components
Purchase and sale of fixed assets and long term investments are important components in investing activities.Issue of shares, obtaining and repayment of borrowing are major elements in financing activities.
Frequency of Investment
Cash flow from investing activities are usually experienced once in a few accounting periods, thus the cash position is not subjected to frequent changes.Cash flow from financing activities is subjected to frequent alterations if there are elements such as repayment of loan.

Summary – Investing Activities vs Financing Activities

The difference between investing and financing activities can be mainly distinguished through understanding the components included in each category. Investments in capital assets will be shown under investing activities and changes to the capital structure will be included in the financing activities. The cash availability is a vital aspect for the routine survival of the business. Net cash position becomes vital for all types of organizations for planning future operating and investment activities. As such, cash flow from investing and financing activities play a major role for the overall cash availability for an organization.

Difference Between Real Cash Flow And Money Cash Flow Formula

Reference:
1.”Activities of the Business: Financing, Investing, and Operating – Boundless Open Textbook.” Boundless. Boundless, 26 May 2016. Web. 10 May 2017. <https://www.boundless.com/accounting/textbooks/boundless-accounting-textbook/introduction-to-accounting-1/overview-of-key-elements-of-the-business-19/activities-of-the-business-financing-investing-and-operating-118-5147/>.
2.”Cash flow statements.” Cash flow statements Students ACCA Global ACCA Global. N.p., n.d. Web. 10 May 2017. <http://www.accaglobal.com/lk/en/student/exam-support-resources/fundamentals-exams-study-resources/f3/technical-articles/cashflow-statements.html>.
3.”Classification of Cash Flows:.” Operating, Investing and Financing Activities – Classification of Cash Flows – AccountingExplanation.com. N.p., n.d. Web. 10 May 2017. <http://www.accountingexplanation.com/classification_of_cash_flows.htm>.

Image Courtesy:
1. “11 Statement Cash Flows Trust Funds” By Ladyfwr – Own work (CC BY-SA 3.0) via Commons Wikimedia

Difference Between Real Cash Flow And Money Cash Flow

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Every business organization, irrespective of the size, structure, and nature, needs cash for running the business smoothly. In the absence of sufficient cash, the business may not be able to fulfill long term and short term obligations, which might lead to discontinuation of business. The movement of cash can be of two types i.e. cash flow and free cash flow. Cash flow refers to the inflow and outflow of cash to/from the organization.

On the contrary, Free cash flow, as the name suggests, is the cash available to the business enterprise. There are many who do not understand the terms clearly and end up juxtaposing the two. so, take a read of the given article to understand the difference between cash flow and free cash flow.

Content: Cash Flow and Free Cash Flow

Comparison Chart

Basis for ComparisonCash FlowFree Cash Flow
MeaningMovement of cash of an organization, resulting in either increase or decrease of its cash is known as cash flow.Cash available with the organization to be distributed among security holders is known as free cash flow.
CalculationThe sum total of Operating, Investing and Financing cash flows.Operating Cash flows less Capital Expenditure.
AdvantageHelpful in determining the liquidity of the company.Helpful in determining a company's financial health.
Difference Between Real Cash Flow And Money Cash Flow

Definition of Cash Flow

The incoming and outgoing of cash in a particular financial year results in the increase or decrease in the cash position of the company is known as cash flow. It arises due to the activities of the business, i.e. operating, investing and financing activities. In a nutshell, the difference between cash at the beginning and the end of the financial year is regarded as cash flow for the respective year.

Here, operating activities amount to the day to day business activities like sales or purchases of merchandise, payment to creditors, suppliers or employees, receipts from debtors, etc. Investing activities account for the sale or purchase of an investment or an asset. Financing activities amount to the issue or redemption of shares or debentures, payment of dividend, etc.

Definition of Free Cash Flow

The actual cash available with the company, for distribution it to its security holders, is known as free cash flow. A positive free cash flow reveals that the company is generating enough cash to run the enterprise efficiently. However, the Negative free cash flow shows that the company is not able to generate sufficient cash, or it has invested money somewhere else which will generate high returns in the future.

There are several methods for the calculation of company’s free cash flow, but one popular method is given as under:

Here,

  • FCF = Free Cash Flow
  • EBIT = Earnings Before Interest and Taxes
  • WC Changes = Working Capital Changes
  • Capex = Capital Expenditure.

Key Differences Between Cash Flow and Free Cash Flow

Difference Between Real Cash Flow And Money Cash Flow Green Screen

the following points discuss the difference between cash flow and free cash flow in detail:

  1. The inflow and outflow of cash during a particular financial year is known as cash flow. The cash left with the company to be apportioned among the shareholders is known as free cash flow.
  2. Cash Flow discloses the solvency of the company whereas Free Cash Flow discloses the performance of the company.
  3. Cash flow is calculated by the summation of operating, investing and financing activities. Free Cash Flow uses only cash from operating activities for its calculation.

Conclusion

Therefore, you might have understood, the meaning and difference between cash flow and free cash flow. The disclosure of both cash flow and free cash flow is important in the company’s financial statement because the investment and financing decision is based on these two factors.

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