Cash Flow Statement

The cash flow statement is a financial statement that shows how cash inflows and cash outflows affect a company's cash position in an accounting period. Learn the definitions, key concepts, how to prepare the statement, and the right way to analyze the numbers.

What is a Cash Flow Statement?


The cash flow statement, also called the statement of cash flows, is one of three main financial statements along with the income statement and balance sheet. The cash flow statement shows how a company manages its cash position by looking how cash is generated and used during an accounting period.

The statement has three main categories: cash flow operating activities (CFO), cash flow from investing activities (CFI), and cash flow from financing activities (CFF).

In order to understand the change in cash balance for an accounting period, you need to find the sum of operating cash flow, investing cash flow, and financing cash flow.

The result of each category could be positive (cash inflow) or negative (cash outflow). And, at the bottom of the statement, each number is added together to reach the total change in cash position for the period.

Business owners, managers, investors, lenders, and more will look to the cash flow statement to understand how the business is generating and using cash. They look to see if the operations of the business (CFO) generate enough cash to make the business self-sufficient, if debt can be covered by the company’s cash balance, and if the business will need additional financing soon.
The beginning cash balance for this period plus the change in cash balance will get you the ending cash balance. This is how the balance sheet and the cash flow statement tie together.

Common size analysis can be performed on the cash flow statement in order to compare firms of different sizes or the same company over multiple periods in time. The common size cash flow statement reports each line item as a percent of revenue.

This can be particularly helpful when forecasting future cash flow, as you can build a forward-looking cash flow statement once you understand your revenue projections.


Cash Flow Statement Template


The cash flow statement follows a standard format. Here is the basic template of a cash flow statement:


Operating Cash Flow
plus Investing Cash Flow
plus Financing Cash Flow
equals Change in Cash Balance
plus Beginning Cash Balance
equals Ending Cash Balance

In the equation above, we are always adding the values together. However, each section could have a result that is a positive number or negative number. A positive cash flow from any section means that the company generated more cash than it used in that given period. A negative cash flow is the opposite, the company used more cash than it generated in the period.

As a general rule, operating activities relate to a company’s current assets and current liabilities, investing activities relate to a company’s non-current assets (also called fixed assets), and financing activities relate to a company’s non-current liabilities (also called long term liabilities) and shareholders’ equity.

This does not hold true always, but is a good starting point when thinking about the statement of cash flows.

Remember that most companies do use cash accounting, they rely on a system of accrual accounting. These accruals mean that there is a difference between what is shown on an income statement and the actual amount of cash the company has.

The cash flow statement lists the necessary transactions to reconcile between the company’s accrual accounting and their actual cash flows of the business.


Operating Activities


Cash flow from operating activities (CFO) refers to transactions that happen during the ordinary course of business. You can think of cash flow from operations as all activities that directly impact net income.

For example, a retail store might purchase additional inventory, which increases current assets and reduces operating cash flow. This is recorded as a cash outflow for CFO because cash was used to purchase inventory.

If the company turns around and sells those goods on credit, that would reduce operating cash flow as well. Accounts receivable (a current asset) would increase and the inventory would be sold, but no cash is collected, which harms cash flow.

In another example, the retail shop might see an increase in accounts payable (a current liability), which is considered a cash inflow for CFO because more cash was kept in the business.

In general, cash collected from customers is a cash inflow from operating activities and items such as cash paid to vendors, suppliers, employees, or other expenses are cash outflows from operating activities. Interest payments and dividends received are a cash inflow from operations, while interest payments and dividends paid are a cash outflow.

Here is a list of operating activity examples:

  • Cash collected from customers
  • Cash paid to vendors, suppliers, and employees
  • Cash paid to cover rent or overhead
  • Cash paid for accounting services, legal fees, or insurance payments
  • Cash paid to acquire current assets
  • Cash collected/paid relating to interest or dividends
Operating activities include cash collected from customers and cash paid to vendors, suppliers, and employees.

Investing Activities


Cash flow from investing activities (CFI) shows changes to the company’s long-term assets and certain investments held by the company. Note, these are not investments made into the company; these are investments the company holds.

A company generates positive cash flow from investing by selling a fixed asset, selling investments, or receiving principal from loans extended to other businesses. By contrast, a company generates negative cash flow from investing by acquiring fixed assets, acquiring debt or equity instruments, or making loans to other businesses.

Here is a list of investing activity examples:

  • Cash collected from sale of fixed asset
  • Cash collected from sale of debt or equity investment
  • Cash collected from principal repayment from its lending
  • Cash paid to acquire fixed asset
  • Cash paid to acquire debt or equity investment
  • Cash paid to offer a loan to another business
Investing activities include purchasing fixed assets and your company making investments into other companies.

Financing Activities


Cash flow from financing activities (CFF) shows changes to the company’s capital structure. This section records the two ways of financing a business, through debt and through equity.

Companies raise money by taking on debt or issuing equity. Both of these are cash inflows to the business. Receiving a loan generates cash and increases total liabilities, while issuing stock generates cash and increases your total shareholders’ equity.

On the other hand, a company will use cash to pay off the principal amount of its debt, reacquire stock from the market, and pay dividends out to shareholders.

Here is a list of investing activity examples:

  • Cash collected from signing a long-term loan
  • Cash collected from issuing common stock
  • Cash collected from issuing preferred stock
  • Cash paid by repaying the principal of a loan
  • Cash paid by reacquiring company stock
  • Cash paid by issuing dividends to shareholders
Financing activities include raising capital through issuing debt or equity. It also relates to repaying loans, doing share buybacks, and issuing dividends.

Direct vs. Indirect Method


There are two methods of reporting for this statement.The direct method converts each item of an accrual-based income statement into a cash-based income statement. At the top, you start with cash receipts from the customer (cash inflow) and then you deduct operating expenses, payments to suppliers, interests, taxes, and more (all cash outflows).
There are two methods of reporting for this statement.The indirect method converts net income to operating cash flow by accounting for all of the non-cash transactions that affect net income. These adjustments include non-cash expenses like amortization and depreciation, non-operating gains and loss, and changes in balance sheet accounts.

When using the indirect method, it’s helpful to remember that:

  • Transactions that increase assets mean a decrease in cash flow
  • Transactions that decrease assets mean an increase in cash flow
  • Transactions that increase liabilities mean an increase in cash flow
  • Transactions that decrease liabilities mean a decrease in cash flow

This is because cash is used to purchase an asset and cash is generated when an asset is sold. Also, liabilities only increase when a company takes on debt or has an obligation to make future cash payments.

Increasing liabilities will increase a company’s cash position in the near term. The opposite happens when liabilities decrease.

As a note, the direct method starts with revenue, which is at the top of the income statement while the indirect method starts with net income, which is the bottom line of the income statement.

Under U.S. Generally Accepted Accounting Principles (GAAP), companies that report using the direct method must also provide the adjustments needed to convert net income to cash flow from operations (CFO).


Cash Flow Statement Example


Now that we have covered all of the key topics, we will walk through a cash flow statement example together. This example uses the indirect method, starting with net income.


EXAMPLE STATEMENT OF CASH FLOWS


Operating Activities

Net Income: $300,000

Adjustments for depreciation: $25,000

Adjustments for amortization: $30,000

Adjustments for increase in inventories: -$75,000

Adjustments for increase in accounts receivable: $15,000

Net Cash Flow from Operations: $295,000


Investing Activities

Cash generated from fixed asset sale: $50,000

Cash paid for fixed asset acquisition: $150,000

Net Cash Flow from Investing: -$100,000


Financing Activities

Cash paid for loan repayment: -$100,000

Cash generated from common stock sale: $250,000

Net Cash Flow from Financing: $150,000


Net Cash Increase for Period: $295,000 -$100,000 + $150,000 = $345,000


Cash at Beginning of Period: $200,000


Cash at End of Period: $545,000


Now that we have walked through this example, let’s discuss each section in a little more detail. First, we started with net income and added back the non cash activities (depreciation and amortization). Next, we looked at our current assets and current liabilities.

In this case, inventory had increased which is a user of cash and accounts receivable decreased which means we collected more cash in the period. The net CFO for the fiscal year 2021 was $295,000. Keep in mind that cash flow from operations usually has the most adjustments.

For cash flow from investing activities, there were only two changes to fixed assets. The company disposed of $50,000 of fixed assets and purchased $150,000 of new fixed assets. The net CFI for the fiscal year 2021 was -$100,000, meaning that the investing activities were consumers of cash in 2021.

For cash flow from financing activities, there were again two changes to record. The company repaid a $100,000 principal on a loan. (Remember that principal repayments are CFF while interest payments are CFO.) In order to fund the loan repayment and the asset purchases, the company sold common stock in exchange for $250,000 of cash.

The company entered 2021 with a cash balance of $200,000, added $345,000 to the bank balance throughout the year, and ended up with a balance of $545,000.


Final Thoughts


Like the income statement and balance sheet, the cash flow statement provides a unique perspective into a company’s financial health. Specifically, this statement shows the net cash flow from the business over a specific period of time.

The cash flow statement does not have its own transactions. Instead, line items on the statement of cash flows come from income statement line items or balance sheet accounts.

Each cash flow statement has three major sections where you will information about operating activities, investing activities, and financing activities. Items related to the company operations, like net income from the income statement or prepaid expenses from the balance sheet, are found in the first section.
The middle section of the statement houses information about company investments, like the purchase of a long-term asset, sale of a long-term assets, or dividends earned by holding shares in another company. This section describes which investments that the company holds, as opposed to who has invested in you.
The last section keeps the information about how the company is financed. For instance, issuing common stock or preferred stock in exchange for cash is recorded as a financing activity. So are bank loans, lines of credit, and dividends paid to shareholders.

Statement of Cash Flows Key Takeaways:

  • The cash flow statement is one of the three main financial statements, along with the income statement and balance sheet
  • The three sections of the statement describe cash flow from operating activities (CFO), investing activities (CFI), and financing activities (CFF)
  • There are two ways of creating a statement of cash flows, the direct method (recreate the income statement using cash instead of accrual) and the indirect method (make adjustments starting with net income)
  • Transactions that increase assets will decrease cash flow, transactions that decrease assets will increase cash flow
  • Transactions that increase liabilities will increase cash flow, transactions that decrease assets will decrease cash flow
  • There are no new cash flow items, all values are taken from either income statement line items or balance sheet accounts

Moreover, there are two ways of creating a cash flow statement – the direct and indirect methods. The direct method starts with revenue (top of the income statement) and makes adjustments for each line item to reflect the actual cash that changed hands.

By contrast, the indirect method starts with net income (bottom of the income statement) and converts that value into operating cash flow.

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