Source and disposition of funds

The source and disposition of funds statement, also known as the cash flow statement, provides a detailed account of how a company obtains and uses its funds over a specific period.
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Updated: Jun 6, 2024

3 key takeaways

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  • The source and disposition of funds statement outlines how a company generates and uses cash and cash equivalents.
  • It is divided into three main sections: operating activities, investing activities, and financing activities.
  • This statement helps stakeholders assess a company’s ability to generate cash, meet obligations, and fund growth.

What is the source and disposition of funds?

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The source and disposition of funds statement, commonly referred to as the cash flow statement, details the cash inflows (sources) and cash outflows (dispositions) of a business over a reporting period. It complements the balance sheet and income statement by providing insights into how a company manages its cash and cash equivalents.

This statement is essential for investors, creditors, and management to understand the liquidity and financial flexibility of the business.

Sections of the cash flow statement

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The cash flow statement is divided into three main sections: operating activities, investing activities, and financing activities.

Operating activities

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Operating activities include the primary revenue-generating activities of the business and other activities that are not investing or financing activities. This section provides insight into the cash generated or used by the company’s core business operations.

Sources of funds from operating activities:

  • Cash receipts from sales of goods and services.
  • Cash receipts from royalties, fees, commissions, and other revenue.
  • Cash received from interest and dividends.

Disposition of funds in operating activities:

  • Cash payments to suppliers for goods and services.
  • Cash payments to and on behalf of employees.
  • Cash payments for interest and taxes.
  • Other cash payments that fall under operating expenses.

Investing activities

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Investing activities include the acquisition and disposal of long-term assets and other investments not included in cash equivalents. This section reflects how a company is investing its resources for future growth.

Sources of funds from investing activities:

  • Proceeds from the sale of property, plant, and equipment.
  • Proceeds from the sale of investments.
  • Cash received from loans and advances made to others.

Disposition of funds in investing activities:

  • Purchase of property, plant, and equipment.
  • Purchase of investments.
  • Loans and advances made to others.

Financing activities

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Financing activities involve changes in the size and composition of the equity capital and borrowings of the company. This section indicates how a company finances its operations and growth through borrowing and shareholder equity.

Sources of funds from financing activities:

  • Proceeds from issuing shares or other equity instruments.
  • Proceeds from issuing debt instruments (loans, bonds).
  • Cash receipts from contributions by owners.

Disposition of funds in financing activities:

  • Repayment of borrowings.
  • Payments of dividends.
  • Payments for repurchasing shares.
  • Payments of lease liabilities.

Importance of the source and disposition of funds statement

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The cash flow statement is crucial for several reasons:

  • Liquidity assessment: It provides insights into the company’s ability to generate cash from operations, which is vital for maintaining liquidity and solvency.
  • Financial health: By examining cash flows from investing and financing activities, stakeholders can assess the company’s financial strategy and long-term sustainability.
  • Performance analysis: The statement helps in understanding the effectiveness of the company’s operating activities in generating cash.
  • Decision-making: Investors and creditors use the statement to make informed decisions regarding investments, lending, and assessing the risk of the company.

The source and disposition of funds statement, or cash flow statement, is a vital tool for understanding a company’s cash flow dynamics. It provides essential information for assessing liquidity, financial health, and overall performance.

By analyzing this statement, stakeholders can make more informed decisions about investing in, lending to, or managing a company. For further exploration, you might look into related topics such as financial statement analysis, liquidity management, and cash flow forecasting.



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Arti
AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.