Reading: The Cash Flow Statement

What's left to be done now is to figure out the actual cash flow to and from the equityholders. 

Cash payouts to the equity holders typically take the form of dividend payments or share repurchases whereas cash inflows from the equity holders are typically related to equity offerings.

We know from our discussion about the firm's balance sheet that the firm pays a dividend of 1'400 to its shareholders. We found that value by comparing the firm's net income with its change in retained earnings. The change in retained earnings indicates that the firm only retains 1'400 of its net income of 2'800. The rest, 1'400, is paid out as a dividend:

Finally, we know from the balance sheet that the share capital remains constant at 100.  Therefore, the firm does not engage in any equity offerings. The cash flows to and from the equity holders can therefore be summarized as follows:

The table shows that the firm pays out a total of 1'400 of its residual cash flow of 1'600 to the equityholders. 

But what about the remaining 200? This is the amount of cash the firm has generated in excess of the cash required to run the operating activities, maintain the assets, and satisfy the claims of the debt and equityholders. This is the so-called excess cash the firm has generated in Year 1, because that cash is not tied up in any of its three sets of activities--operations, investments, and financing. It's additional cash that remains "unused” on the balance sheet. A look at the balance sheet confirms that Excess cash has indeed increased by 200 from 0 to 200 during Year 1.