What Is a Cash Flow Statement?

Introduction

A cash flow statement is an accounting report that outlines the cash flow into and out of a business over a specific period. This document provides vital information to investors and stakeholders on the operations, financing, and investments that make up the cash flow of a business.

The cash flow statement provides a comprehensive view of a company’s financial position and shows how a company is performing financially. It outlines the sources of the company’s cash (inflows) and the uses of the cash (outflows) over a period of time, usually a quarter or year.

Overview of Information Provided

• Operating cash flow - details of the cash inflows from sales and cash outflows from operating costs
• Investing cash flow - details of the cash outflows for capital expenditures and cash inflows from investments
• Financing cash flow - details of the cash inflows and outflows from financing activities

Types of Cash Flow Statements

A cash flow statement provides information on an organization's cash receipts and cash payments during a specific period of time. It tracks an organization's cash flow to show how net cash related to its operations, financing, and investing activities is changing over time. Cash flow statements are usually prepared from activities reported on the organization's balance sheet and income statement.

There are two methods for reporting cash flow statements: the direct method and the indirect method. Both methods report the same information, but present various amounts and provide different levels of detail.

Direct Method

The direct method of reporting cash flow presents the major classes of gross cash flows that are inflows, or receipts, and outflows, or payments, associated with the organization's operations, investments and financing. This method provides detail and better understanding of an organization's cash-producing activities and is typically more relevant to the users of financial statements.

Indirect Method

The indirect method uses accrual basis accounting to begin with net income for the period and adjust for non-cash items. This method compares changes in the balance of various accounts on the balance sheet from period to period to determine the amount of cash flow from operations, investments, and financing.

Analyzing Cash Flow Statements

When analyzing a cash flow statement, it is important to look at both cash inflows and cash outflows. Cash inflows are the sources of cash coming into the business, while cash outflows are the amounts of cash leaving the business.

Cash Inflows

Cash inflows include the sale of goods and services, the cash backing of debt instruments like bonds, loans, and interest receipts. In addition, cash inflows may include investments made in the business, such as investments in capital and other assets, as well as cash received from the sale of investments like stocks and bonds.

Cash Outflows

Cash outflows include the purchase of goods and services, funds expended on research and development, cash paid out on debt instruments like loans, and funds provided to investing activities like investments in other businesses, stocks, and bonds. Cash outflows also include expenses for the business such as wages, utilities, rent, and taxes.

When analyzing a company's cash flow, it is important to understand both the cash inflows and cash outflows in order to evaluate the overall financial stability and performance of the business. By understanding the difference between the cash inflows and outflows, businesses can make better decisions regarding investments, capital acquisitions, and operations.

Cash Flow Statement vs. Income Statement

Businesses use both a cash flow statement and an income statement to understand their finances. They both paint a picture of how money is coming in and going out of the business, but each makes use of unique information to compile. By understanding how they both differ, businesses can gain a better understanding of where their money is going.

Primary differences

The most significant difference between the cash flow statement and income statement is the type of data each report presents. The cash flow statement records actual payments made, while the income statement reflects business performance over a certain amount of time. The income statement shows net income and usually takes into account things such as depreciation, taxes, and interest.

Another primary difference is the format each document is presented in. The cash flow statement is shown in table format, much like a spreadsheet, and it is organized into three sections: operating activities, investing activities, and financing activities. The income statement is usually shown in a simple direct format including information from revenues, expenses, and net income.

Areas of Overlap

As different entities, the cash flow statement and income statement do not always overlap when it comes to their uses. That said, there are a few areas to consider. For example, both statements help businesses track how money flows in and out and identify areas of weakness or unexpected issues. They can also help businesses anticipate budgeting needs and plan ahead.

The cash flow statement and income statement both also serve to indicate whether the business is in a healthy financial position and can help provide future insights into potential investments and other financial decisions. Additionally, changes that occur in one statement can have an effect on the other.

Statement of Cash Flows Components

The primary components of the Statement of Cash Flows are the Operating activities, Investing activities, and Financing activities.

Operating Activities

Operating activities in the Statement of Cash Flows represent the cash inflows and outflows due to day-to-day activities, such as collecting accounts receivable, making payments to suppliers and employees, and incurring operating expenses. Operating activities also include net income.

Investing Activities

Investing activities involve cash transactions related to long-term assets, such as additions or disposals of property, plant, and equipment, investments in stocks and bonds, and deposits in banks and other financial institutions. Generally, these activities generate either a source of funds or a use of funds.

Financing Activities

Financing activities involve cash transactions related to the company’s capitalization, such as issuance of debt and equity and payments of dividends, mandatory reductions in capital, and debt repayments. These activities generally represent a source of funds or a use of funds.

• Issuance of debt and equity
• Payments of dividends
• Mandatory reductions in capital
• Debt repayments

Cash Flow Statement Example

A cash flow statement provides an overview of sources and uses of cash throughout a given period of time. By reviewing a cash flow statement, a user can determine the business’s overall financial status and performance, as well as its ability to generate and plan for future activities. This article will provide an example of a cash flow statement and discuss related topics.

Overview of Example Statement

The following example is prepared for ABC Co., a fictional retail store that has been operating for three years. The example is for ABC Co.'s fiscal year ended December 31, 2020.

• Cash provided by operations: $50,000
• Cash used in operations: $30,000
• Cash provided by investing activities: $25,000
• Cash used in investing activities: $12,000
• Cash provided by financing activities: $20,000
• Cash used in financing activities: $15,000
• Net change in cash: $28,000

Discussion of Related Topics

A cash flow statement provides a clear picture of the flow of funds throughout a business. It can be used to track the company’s cash position and liquidity over time, as well as identify areas of potential cash flow issues. For example, a company can use its cash flow statement to identify how much cash it has available for investment, debt repayment, or to finance other activities.

The cash flow statement can also provide insights into the potential long-term financial health of the business. For example, a growing trend of positive cash flows may suggest that the business is stable and generating solid cash flows. Conversely, trends of negative cash flow may indicate that the company is struggling and is unlikely to be able to sustain itself in the future.

Finally, a cash flow statement can be used to assess the company’s ability to pay its obligations and can be used to compare the company’s cash flow performance to that of other businesses in the same industry. By taking all of these factors into consideration, the cash flow statement can provide an invaluable snapshot of the business’s overall financial health.

Conclusion

A cash flow statement is an important financial statement that provides insight into the cash inflows and outflows of a company. It is used in assessing a company’s financial health and allows business owners to understand the company's liquidity. A cash flow statement is composed of three subtotals: operating, investing, and financing activities.

Having a full understanding of one’s cash flow statement is a great asset for both business owners and accountants. This document is foundational in evaluating the performance of the company in terms of its ability to generate and manage cash. By integrating a cash flow statement into one’s financial analysis, stakeholders gain a bird’s eye view into a company’s available resources as well as future prospects.

The following are some of the benefits of understanding one’s cash flow statement:

• Gain insight into a company’s profitability
• Make strategic decisions on the allocation of funds and investments
• Identify trends which can aid in forecasting and budgeting
• Understand one’s ability to pay dividends and debt

Overall, a cash flow statement is a great tool for understanding a company’s current financial position and its ability to generate, manage, and redistribute funds. With its numerous benefits, keeping track of cash flow is essential to the successful management of any business.