Note that interest payments are considered part of normal operational expenses and are factored into the operating segment, not the financing segment, of the cash flow statement. Factors such as cash received from the issuance of new shares of stock or debt, payment of dividends to stockholders and the cash used to repurchase stocks to retire debt are summarized in this segment. The financing segment of the cash flow statement examines how the company finances its endeavors and how it rewards its shareholders through dividend payments. A positive cash flow from investing activities indicates a divestiture or sale of the long-term assets of the firm. Negative cash flow from investing activities indicates that the company made additional long-term investments in the company’s long-term assets or outside investments. Factors recorded in this segment can include purchases of property, plant and equipment investment or sale of marketable securities and investments or divestitures in unconsolidated subsidiaries. The investing segment of the cash flow statement attempts to capture the company’s investment in the long-term capital of the firm. A negative cash flow from operations indicates that additional cash inflows were required for day-to-day operations of the firm. A positive cash flow from operations implies that a firm was able to generate enough cash from continuing operations without the need for additional funds. It considers factors such as cash from the collection of accounts receivable, the cash incurred to produce any goods or services, payments made to suppliers, labor costs, taxes and interest payments. The operating cash flow segment is designed to measure a company’s ability to generate cash from day-to-day operations as it provides goods and services to its customers. The statement divides company uses and sources of cash into three primary segments-operating, investing and financing cash flows. On the other hand, much like a personal checkbook, cash accounting tracks cash inflows and outflows directly when they actually occur. Prepaid expenses such as income taxes and software development costs may not flow through the income statement when the costs are incurred. Higher sales may not translate into higher cash flow if accounts receivable are allowed to grow faster than sales. But even then, the recognition of this inventory cost may vary from firm to firm if one company uses a last in, first out (LIFO) method to measure the cost of inventory sold while another firm uses a first in, first out (FIFO) method. For example, cash used to build up inventory will not be reflected as an expense on the income statement until the inventory is sold. Accrual accounting attempts to match expenses to revenues when the revenues can be expected to be recognized. This widely used cash flow estimate has many weaknesses that arise out of the use of accrual accounting for the calculation of the income statement.
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