Understanding The Cash Flow Statement

The cash flow statement (CFS), also known as the cash flow statement, is a financial statement that sums up the amount of cash and cash equivalents entering and exiting a business. It is one of the key analysts used in the creation of a three-state model through financial statements. The main categories found in a cash flow statement are (1) operating activities, (2) investing activities, and (3) financing activities of a company and are organized respectively. The cash flow statement basically concerns the flow of cash in and out of the company.

The cash flow statement (CFS) was previously known as the flow of funds statement, and it reflects a firm’s liquidity. CFS tests how well a corporation handles its cash position, in other words how well the company produces cash to meet its debt obligations and funds its operating expenses. The cash flow statement contains only cash and cash equivalent inflows and outflows; it excludes transactions which have no direct impact on cash receipts and payments.

The cash flow statement’s key components are cash from operating operations, cash from investing activities, and cash from finance activities. One of the key factors for measuring cash inflows and outflows is to equate the cash from sales to net profits. This contrast helps managers, analysts and investors gage how well an organization is performing its operations.

CFS reflects the particular amount of cash the corporate receives from its operations. It allows investors to grasp how a company’s operations are running, where its money is coming from, and the way money is being spent. CFS was introduced as a common financial statement since it excludes variables that could be obtained from multiple accounting techniques, such as varying timeframes for depreciation of fixed assets. The CFS is critical because it lets investors decide whether a firm is on a sound financial footing.

In contrast, the income statement only recognizes cash that has actually been received or disbursed. It is vital to notice that the CFS is distinct from the financial statement and record because it doesn’t include the quantity of future incoming and outgoing cash that has been recorded on credit. Consequently, cash is not the same as net income which includes cash sales and credit sales on the income statement and balance sheet. The cash flow statement is partitioned into three segments, namely:

  • Cash flow resulting from operating activities: The statement of cash flow starts with cash flow from operating activities. It begins with net income or loss, followed by additions to or subtractions of that amount to change the net income to total cash flow. What is added or subtracted is adjustments in the amount of things contained in current assets and existing balance sheet liabilities, as well as non-cash accounts (e.g., stock-based compensation).
  • Cash flow resulting from investing activities: Investing activities include all sources and use of cash from investments made by a business. Included in this category are transactions or sales of an asset, loans made to suppliers, or obtained from customers or any payments related to a merger or acquisition. In short, changes in facilities, assets, or investments are related to investing cash.
  • Cash flow resulting from financing activities: Financing operations include capital inflows from investors including banks and shareholders, as well as cash outflows to shareholders as dividends as the company earns sales. The funding activities portion of the cash flow statement also lists other operations that affect the company’s long-term liabilities and equity.

The money coming into the business is named cash inflow, and money going out from the business is termed cash outflow. Sometimes, negative income is the result of a company’s decision to expand its business at a specific point in time, which might be an honest thing for the longer term. This is why evaluating shifts in cash flow from one cycle to the next gives the investor a better idea of how the company performs, and whether a company may or may not be on the brink of bankruptcy or success.


Information Sources:

  1. investopedia.com
  2. corporatefinanceinstitute.com
  3. wikipedia