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invest the remaining profits. The retained profits increase the shareholders' equity account (retained earnings). In theory, these reinvested funds are held for the shareholders' benefit and reflected in a higher share price.
This basic flow of cash through the business introduces two financial statements: the balance sheet and the statement of cash flows. It is often said the balance sheet is a static financial snapshot taken at the end of the year (please see "Reading the Balance Sheet" for more details), whereas the statement of cash flows captures the "dynamic flows" of cash over the period (see "What is a Cash Flow Statement?").
Statement of Cash Flows
The statement of cash flows may be the most intuitive of all statements. We have already shown that, in basic terms, a company raises capital in order to buy assets that generate a profit. The statement of cash flows "follows the cash" according to these three core activities: (1) cash is raised from the capital suppliers (which is the 'cash flow from financing', or CFF), (2) cash is used to buy assets ('cash flow from investing', or CFI), and (3) cash is used to create a profit ('cash flow from operations', or CFO).
However, for better or worse, the technical classifications of some cash flows are not intuitive. Below we recast the "natural" order of cash flows into their technical classifications:
You can see the statement of cash flows breaks into three sections:
1. Cashflowfromfinancing(CFF)includescashreceived(inflow)forthe issuance of debt and equity. As expected, CFF is reduced by dividends paid (outflow).
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