Cash Flow Statement

A cash flow statement is a financial report showing a business’s cash inflow and outflow during a specified period of time. It will include cash a company receives from operations, investment sources and what was purchased with said cash. The purpose of this statement is to provide details on how a business is operating short-term and long-term. It also provides insight into a business’s ability to pay creditors based on how they manage their cash flow. A cash flow statement may be part of a bigger financial statement that includes a balance sheet, an income statement, statement of stockholders’ equity, and notes to the financial statements.  

Parts of a Cash Flow Statement 

A cash flow statement normally consists of three sections: cash from operations, cash from investing, and cash from financing.  

Cash Flow from Operations 

The first section of a cash flow statement is cash from operations. This covers all transactions from day-to-day operational business activities. For example, paying employees, purchasing inventory and supplies. This section may also include accounts payable, depreciation, prepaid items, and more.  

Cash Flow from Investing  

The second section of this statement is cash from investing, which covers investment gains and losses. It may include long-term assets such as real estate, proceeds from the sale of other businesses, equipment, and more. Investors typically want to see a higher cash flow from business operations, it is important to have a positive cash flow from investing.  

Cash Flow from Financing  

The last section of a cash flow statement is cash flow from financing. It evaluates loans taken out, loans paid back, dividends, debt, and equity. This is specifically to cover cash flow between a business and their creditors, which is telling if a business can pay off a debt or not. If the cash flow from financing is positive, it indicates more money is coming into the company than coming out. If cash flow is negative, cash outflow is higher than cash inflow, but this does not necessarily mean profit is lost.  

How to Read a Cash Flow Statement 

A cash flow statement shows where a business is financially at present. A positive cash flow would show a business has more money coming into the business over a specific period of time and their liquid assets are increasing. A negative cash flow would indicate cash outflow is higher than inflow. This does not conclusively indicate a business is not making a profit, but they may be expanding or investing in future growth. Therefore, it is important to analyze all components of a cash flow statement, and different periods of time.  

How to Calculate Cash Flow 

To calculate cash flow, two methods used are the direct and indirect method. The direct method adds up cash gained from operating activities and subtracts it from all the cash payments made. This method examines changes in cash payments and receipts, which is typically preferred by smaller businesses. On the other hand, the indirect method adds or subtracts differences from non-cash transactions. It begins will net income on an accrual basis, which is usually favored by larger businesses who already use accrual accounting.  

Example of a Cash Flow Statement