"Cash flow" refers to the cash coming in to and out of a company. It differs from the income and expenses as measured in a company's income statement. You can find details of a company's cash flows during a given period of time in its statement of cash flows.
A number of financing activities that are not found in an income statement are considered cash flow. Borrowing money, for instance, brings in cash, but it's neither income nor an expense. (Paying interest on that borrowed money, however, is an expense.)
Issuing stock is another activity that isn't considered a source of income. A company might issue common stock for a number of reasons. Here are a few:
- To raise capital.
- To pay executives, whether through restricted stock of exercised stock options.
- Stock splits.
- To sell to or pay as dividends to existing shareholders.
How issuing common stock can increase cash flows
Although issuing common stock often increases cash flows, it doesn't always. During stock splits, for instance, a company issues new shares that it gives to current shareholders. When a company issues and sells stock, say, to the public, to dividend reinvestment plan shareholders, or to executives exercising their stock options, the money it collects is considered cash flow from financing activities.
In fiscal year 2015, Hormel Foods, the popular producer of refrigerated and shelf-stable meat products and meal solutions, brought in $10.5 million from issuing new shares. When a company collects money for new shares, you can usually find a line in its cash flow statement called something like "issuance of common stock." In Hormel's case, because the new shares issued were the result of executives exercising their stock options, that's how it's listed:
Interested in buying stocks? Click here to visit our broker center and get started investing today!
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at firstname.lastname@example.org. Thanks -- and Fool on!
The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.