The financial segment of the cash flow statement examines how the company finances its endeavors and how it rewards its shareholders through dividend payments. 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 or to retire debt are summarized by this segment. Note that interest payments are considered part of normal operational expenses and are factored into the operations segment, not the financing segment, of the cash flow statement. Interest income will not appear as a separate line item on the cash flows from operations segment if the indirect method is used, because it is already factored into the calculation of net income. Cash dividends paid to shareholders are considered a return of capital, so they are reported within the financing section.
When it comes to sources and uses of cash, cash inflows include proceeds from issuing stock, notes, bonds, mortgages, and other short-term or long-term borrowing. Cash outflows for financing activities include payments of dividends to owners, repayments of money borrowed, and repurchase of stock.
The cash flow statement also includes a separate section that details the impact of foreign currency translation on the company's cash flow. This line item will not appear for companies in which the effect was negligible. However, the line item can be substantial for multi-national companies.
Continue to Step 5 »
