Cash Flow Statement – Explained + Examples

A cash flow statement is a financial statement that shows the cash inflows and outflows of a company during a specific period of time. It provides insight into a company’s liquidity, or its ability to pay its bills and meet financial obligations.

The cash flow statement is divided into three main sections: operating activities, investing activities, and financing activities.

Operating activities include the cash inflows and outflows from the day-to-day operations of the business, such as sales, salaries, and rent. Investing activities include cash inflows and outflows from investments in assets such as property, equipment, and securities. Financing activities include cash inflows and outflows from activities related to raising and paying off debt or issuing and repurchasing stock.

The cash flow statement is important because it provides information about the actual cash that is flowing in and out of a company, as opposed to just the accounting profits or losses reported on the income statement. This can be useful for evaluating a company’s ability to generate cash, pay its debts, and invest in future growth.

Investors and analysts may use the cash flow statement to evaluate a company’s financial health and stability, as well as its ability to generate cash in the future. The cash flow statement can also help identify potential areas of concern, such as high levels of debt or negative cash flow from operating activities.

Overall, the cash flow statement is an important tool for understanding a company’s financial position and is used in conjunction with other financial statements to evaluate a company’s performance and potential for growth.

See also:
Financial Statement – Explained.
Income Statement – Explained.

Some examples to help illustrate the concept of cash flow statement:

• Let’s say a company has $1 million in cash inflows from sales, $500,000 in cash outflows for salaries and rent, and $100,000 in cash outflows for investing in new equipment during a specific period of time. The net cash inflow from operating activities would be $500,000 ($1 million – $500,000), and the net cash outflow from investing activities would be -$100,000. To calculate the overall net change in cash, the net cash inflows from operating and investing activities would be added together with any net cash inflows or outflows from financing activities, such as issuing or repurchasing stock or paying off debt.
• A company may have negative cash flow from operating activities if its expenses are higher than its revenues. This may indicate that the company is not managing its finances efficiently or that it is experiencing a temporary downturn in business. Investors may want to examine why the cash flow from operating activities is negative and whether the company has a plan to improve its financial position.
• A company may have positive cash flow from investing activities if it is making strategic investments in new property, equipment, or other assets. This can be a positive sign if the investments are expected to generate future revenue or cost savings. However, if the company is making too many investments that do not generate a return, it may be a cause for concern.
• If a company has high levels of debt, it may be reflected in the cash flow statement through a high net cash outflow from financing activities, such as making loan payments or issuing new debt. This may indicate that the company is relying heavily on debt to finance its operations and may be at risk if it is unable to meet its financial obligations in the future.
• A company with positive cash flow from operating activities and investing activities may be viewed as financially healthy and well-positioned for future growth. However, investors should also consider other factors such as the company’s profitability, market position, and competition before making investment decisions.

The formula for the cash flow statement is:

Net Cash Flow = Cash inflows – Cash outflows

The net cash flow is calculated separately for each section of the statement, and then the net cash flows for each section are added together to determine the overall net change in cash during the period. Here is the formula for each section:

Operating activities: Net Cash Flow from Operating Activities = Cash inflows from operations – Cash outflows from operations

Investing activities: Net Cash Flow from Investing Activities = Cash inflows from investing – Cash outflows from investing

Financing activities: Net Cash Flow from Financing Activities = Cash inflows from financing – Cash outflows from financing

The final line of the cash flow statement shows the overall change in cash for the period, which is the sum of the net cash flows from each section:

Net Change in Cash = Net Cash Flow from Operating Activities + Net Cash Flow from Investing Activities + Net Cash Flow from Financing Activities