Cash Flow Statement

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Cash Flow Statement

Definition

A cash flow statement summarizes all cash inflows and outflows of a business over a period, organized by operating, investing, and financing activities. It shows how cash moves through a company and complements the balance sheet and income statement.

Key takeaways

  • Shows cash generated and used by operations, investing, and financing; the net of these is net cash flow.
  • Helps assess liquidity and whether a company generates cash from its core business.
  • Prepared using the direct or indirect method.
  • Especially useful because accrual-based income (reported on the income statement) may not reflect actual cash available.

How it fits with other financial statements

  • Balance sheet — snapshot of assets, liabilities, and equity at a point in time.
  • Income statement — revenues and expenses for a period (accrual basis).
  • Cash flow statement — actual cash received and paid during the period.
    Together these statements give a fuller picture of financial condition and performance.

Accounting approaches

  • Accrual accounting records income when earned and expenses when incurred; it can show profit without corresponding cash.
  • Cash accounting records transactions when cash changes hands; the cash flow statement reports cash movements regardless of accrual accounting on the income statement.
  • Two preparation methods:
  • Direct method — lists actual cash receipts and cash payments.
  • Indirect method — starts with net income and adjusts for noncash items and changes in working capital.

Organization: three sections

The statement is divided into three main sections. The sum of their results equals net change in cash for the period.

1. Cash flows from operating activities (CFO)

  • Reflects cash generated or used by a company’s core business operations.
  • In the indirect method, starts with net income and adjusts for noncash items such as depreciation and changes in working capital (accounts receivable, inventory, accounts payable, prepaid expenses).
  • Positive CFO from core operations is generally preferred — sustainable cash generation indicates financial health.

2. Cash flows from investing activities (CFI)

  • Includes cash used for or received from purchases and sales of long-term assets (property, plant, equipment), acquisitions, and investments.
  • Increased capital expenditures (capex) reduce cash in the short term but may signal investment in growth.
  • Cash inflows here typically come from asset sales or divestitures.

3. Cash flows from financing activities (CFF)

  • Shows cash exchanged with owners and creditors: debt issuance/repayment, equity issuance, dividends, and share buybacks.
  • Positive CFF indicates net cash raised (new debt or equity); negative CFF often means debt paydown, dividend payments, or buybacks.

How analysts and investors use it

  • Evaluate liquidity and short-term solvency (ability to meet obligations).
  • Determine whether a company’s profits are backed by cash.
  • Assess the quality of earnings (are earnings supported by operating cash?).
  • Understand capital allocation: funding growth (capex), returning cash to shareholders, or increasing leverage.

Common interpretations / quick FAQs

  • Which cash flows appear in operations?
    Cash receipts and payments related to core business: collections from customers, payments to suppliers and employees, interest and taxes (classification may vary), and adjustments for depreciation/amortization and working capital changes.

  • What happens when capital expenditures increase?
    Cash flow from investing typically falls because cash is spent on long-term assets. That reduction can be positive if it funds productive growth, or negative if it strains liquidity without returns.

  • What does negative cash flow from financing mean?
    It often indicates the company is repaying debt, paying dividends, or buying back shares. Context matters: debt repayment reduces leverage but uses cash; dividends/buybacks return cash to shareholders.

Bottom line

The cash flow statement reveals real cash movement and is essential for assessing a company’s liquidity and financial flexibility. Investors generally prefer companies that generate the bulk of their cash from operating activities, since that indicates a sustainable business model rather than reliance on asset sales or financing.