Chapter 12
Using Accounting Information
377
way a company receives money from those providing financing and pays it back. Companies pay
back loans with interest to banks and they pay out cash dividends to shareholders.They also receive
cash by selling shares and taking out bank loans.
A business that is focused on growth and expansion is likely to be raising money through financing
activities such as selling shares or acquiring bank loans. In this case, it would have positive cash
flows from financing activities.On the other hand, a well-established business may be attempting to
pay back its banks loans and reward shareholders with dividend payments.Therefore it would have
negative cash flows from financing activities. For example, Second Cup has been paying dividends
to shareholders, but it made a large sale of common shares in the past year. This, combined with
the purchase of new equipment, indicates that it may have recently developed new expansion plans.
As you can see, there are no hard and fast rules to analyze cash flows. However, it is never a good
sign to have consistently overall negative cash flows or to have a dangerously low balance of cash at
any point in time. Companies can be quite profitable and have excellent financial ratios, but if they
don’t have any cash to pay their bills with, they will soon be in big trouble. Companies can avoid
certain financial issues by always remaining aware of their financial situation.
