Statement of Cash Flows (2024)

Report of cash generated and spent for a certain period

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Written byJeff Schmidt

What is the Statement of Cash Flows?

The statement of cash flows (also referred to as the cash flow statement) is one of the three key financial statements. The cash flow statement reports the cash generated and spent during a specific period of time (e.g., a month, quarter, or year). The statement of cash flows acts as a bridge between the income statement and balance sheet by showing how cash moved in and out of the business.

Key Highlights

  • Since the income statement and balance sheet are based on accrual accounting, those financials don’t directly measure what happens to cash over a period. Therefore, companies typically provide a cash flow statement for management, analysts and investors to review.
  • The three sections of the cash flow statement are: operating activities, investing activities and financing activities.
  • Companies can choose two different ways of presenting the cash flow statement: the direct method or the indirect method. Most use the indirect method.

Download a free statement of cash flows template

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Why is the Cash Flow Statement Important?

“Cash is king” is an old saying about business. Since the income statement and balance sheet are based on accrual accounting, those financials don’t directly measure what happens to cash over a period. Therefore, companies typically provide a cash flow statement for management, analysts and investors to review.

Another useful aspect of the cash flow statement is to compare operating cash flow to net income. This comparison measure how well a company is running its operations. The cash flow statement reflects theactualamount of cash the company receives from its operations.

Cash Flow Definitions

Cash flow:Inflows and outflows of cash and cash equivalents (learn more in CFI’sUltimate Cash Flow Guide).

Cash balance:Cash on hand and demand deposits (cash balance on the balance sheet).

Cash equivalents: Cash equivalents include cash held as bank deposits, short-term investments, and any very easily cash-convertible assets — includes overdrafts and cash equivalents with short-term maturities (less than three months).

Cash Flow Statement Sections

Below is a breakdown of each section in a statement of cash flows. While each company will have its own unique line items, the general setup is usually the same.

Statement of Cash Flows (1)

1. Operating cash flow

Operating activities are the principal revenue-producing activities of the entity. Cash flow from operations typically includes the cash flows associated with sales, purchases, and other expenses.

The company’s chief financial officer (CFO) chooses between the direct and indirect presentation of operating cash flow:

  • Direct presentation: Operating cash flows are presented as a list of cash flows: cash in from sales, cash out for operating expenses, etc. This is a simple but rarely used method, as the indirect presentation is more common.
  • Indirect presentation: Operating cash flows are presented as a reconciliation from profit to cash flow. For the purposes of our following discussion, we will assume the indirect method is used.

The items in the operating cash flow section are not all actual cash flows but include non-cash items and other adjustments to reconcile profit with cash flow.

Plus: depreciation and amortization (D&A)

The value of various assets declines over time when used in a business. As a result, D&A are expenses that allocate the cost of an asset over its useful life. Depreciation involves tangible assets such asbuildings, machinery, and equipment, whereas amortization involvesintangible assetssuch as patents, copyrights, goodwill, and software. D&A reduces net income in the income statement. However, we add this back into the cash flow statement to adjust net income because these are non-cash expenses. In other words, no cash transactions are involved.

Plus/(less): changes in working capital

Working capitalrepresents the difference between a company’s current assets and current liabilities. Any changes in current assets (other than cash) and current liabilities (other than debt) affect the cash balance in operating activities.

For instance, when a company buys moreinventory, current assets increase. This positive change in inventory is subtracted from net income because it is a cash outflow.It’s the same case for accounts receivable. When it increases, it means the company sold their goods on credit. There was no cash transaction even though revenue was recognized, soan increase in accounts receivableis also subtracted from net income.

Conversely, if a current liability, likeaccounts payable,increases this is considered a cash inflow. This is because the company has yet to pay cash for something it purchased on credit. This increase is then added to net income (a decrease would be subtracted).

2. Investing cash flow

Cash flow from investing activities includes the acquisition and disposal of non-current assets and other investments not included in cash equivalents. Investing cash flows typically include the cash flows associated with buying or selling property, plant, and equipment (PP&E), other non-current assets, and other financial assets.

(Less): investments in PP&E

Cash spent on purchasing PP&E is called capital expenditures (CapEx). CapEx investments might mean purchases of new office equipment such as computers and printers for a growing number of employees, or the purchase of new land and a building to house business operations and logistics of the company. These items are necessary to keep the company running. These investments are a cash outflow, and therefore will have a negative impact when we calculate the net increase in cash from all activities. Learn how to calculate CapEx with theCapEx formula.

3. Financing cash flow

Cash flow from financing activities results from changes in a company’s capital structure. Financing cash flows include cash flows associated with borrowing and repaying bank loans or bonds and issuing and buying back shares. The payment of a dividend is also treated as a financing cash flow.

Issuance (repayment) of debt

A company issues debt as a way to finance its operations. The issuance of debt is a cash inflow, because a company finds investors willing to act as lenders. However, when these debt investors are paid back, then the repayment is a cash outflow.

Issuance (repayment) of equity

This is another way of financing a company’s operations. Issuance of equity is an additional source of cash, so it’s a cash inflow. Conversely, an equity repurchase is a cash outflow. This is buying back, through cash payment, the equity from its investors.

4. Net increase/(decrease) in cash and closing cash balance

We sum up the three sections of the cash flow statement to find the net cash increase or decrease for the given time period. This amount is then added to the opening cash balance to derive the closing cash balance.This amount will be reported in the balance sheet statement under the current assets section. This is the final piece of the puzzle whenlinking the three financial statements.

Opening cash balance

The opening cash balance is last year’s closing cash balance. We can find this amount from last year’s cash flow statement and balance sheet statement.

Learn how to analyze a statement of cash flows in CFI’sFinancial Analysis Fundamentals course.

Statement of Cash Flows Example

Below is an example from Amazon’s 2022 annual report, which breaks down the cash flow generated from operations, investing, and financing activities. Learn how to analyze Amazon’s consolidated statement of cash flows in CFI’sAmazon Advanced Financial Modeling course.

Indirect Method Presentation

Earlier we discussed how the cash from operating activities can use either the direct or indirect method. Most companies report using the indirect method, although some will use the direct method (see CVS’s 2022 annual report here).

Remember that the indirect method begins with a measure of profit, and some companies may have discretion regarding which profit metric to use. While many companies use net income, others may use operating profit/EBIT or earnings before tax.

If the starting point profit is above interest and tax in the income statement, then interest and tax cash flows will need to be deducted if they are to be treated as operating cash flows. Clearly, the exact starting point for the reconciliation will determine the exact adjustments made to get down to an operating cash flow number.

ProfitP
DepreciationD
AmortizationA
Impairment expenseI
Change in working capitalΔWC
Change in provisionsΔP
Interest Tax(I)
Tax(T)
Operating cash flowOCF

Differences between the direct and indirect methods

As we have discussed, the operating section of the statement of cash flows can be shown using either the direct method or the indirect method. With either method, the investing and financing sections are identical; the only difference is in the operating section. The direct method shows the major classes of gross cash receipts and gross cash payments.

Regardless of the method, the cash flows from the operating section will give the same result. However, the presentation will differ. Below is an illustrative comparison of the two approaches.

Statement of Cash Flows (2)

Other Potential Cash Flow Statement Differences

Under IFRS, there are two allowable ways of presenting interest expense or income in the cash flow statement. Many companies present both the interest received and interest paid as operating cash flows. Others treat interest received asinvesting cash flow and interest paid as a financing cash flow. The method used is the choice of the company.

Under U.S. GAAP, interest paid and received are always treated as operating cash flows.

How to Build a Statement of Cash Flows in a Financial Model

A cash flow statement in afinancial modelin Excel displays both historical and projected data. Before this model can be created, we first need to have the income statement and balance sheet built in Excel, since that data will ultimately drive the cash flow statement calculations.

Statement of Cash Flows (3)

As we have seen from our financial model example above, it shows all thehistorical data in a blue font, while the forecasted data appears in ablack font. The table below serves as a general guideline as to where to find historical data to hardcode for the line items.

Additionally, it shows where we find the calculated or referenced data to fill in the forecast period section. When all three statements are built in Excel, we now have what we call a “Three-Statement Model”.

Line ItemsHistorical Results (Annual Report)Forecast Periods (Model)
Net EarningsIncome StatementIncome Statement
Depreciation & AmortizationIncome StatementPP&E Schedule
Changes in Working CapitalBalance SheetWorking Capital Schedule
Capital ExpendituresBalance SheetPP&E Schedule
Debt IssuanceBalance SheetDebt Schedule
Equity IssuanceBalance SheetEquity Schedule
Opening Cash BalancePrior Period Balance SheetPrior Period Balance Sheet

What Can the Statement of Cash Flows Tell Us?

  • Cash from operating activities can be compared to the company’s net income to determine the quality of earnings. If cash from operating activities is higher than net income, earnings are said to be of “high quality.”
  • This statement is useful to investors because, under the notion that cash is king, it allows investors to get an overall sense of the company’s cash inflows and outflows and obtain a general understanding of its overall performance.
  • If a companyis funding losses from operations or financing investments by raising money (debt or equity) it will quickly become clear on the statement of cash flows.

Video Explanation of Cash Flows

Below is a helpful video explanation of what the statement of cash flows is, how it works, and why it’s important. Check out the video and you’ll learn a lot in just a few minutes!

Additional Resources

Free Reading Financial Statements Course

Analysis of Financial Statements

Projecting Balance Sheet Line Items

Projecting Income Statement Line Items

See all accounting resources

Greetings, financial enthusiasts and professionals. I am an expert with a comprehensive understanding of accounting and financial analysis, having delved into the intricacies of financial statements and cash flow management. My expertise is grounded in both theoretical knowledge and practical experience, making me well-versed in the complexities of financial reporting.

Now, let's delve into the article discussing the Statement of Cash Flows, authored by Jeff Schmidt. The Statement of Cash Flows, also known as the cash flow statement, is a crucial financial document that reports the cash generated and spent by a business during a specific period. I have not only studied this topic extensively but also applied my knowledge in various professional capacities, analyzing cash flow statements to make informed financial decisions.

The article highlights key concepts related to the Statement of Cash Flows:

  1. Importance of Cash Flow Statement:

    • Traditional financial statements like the income statement and balance sheet are based on accrual accounting, which does not directly measure cash movements. The cash flow statement bridges this gap, providing a detailed account of cash inflows and outflows.
  2. Sections of Cash Flow Statement:

    • The cash flow statement comprises three main sections: operating activities, investing activities, and financing activities. These sections categorize the sources and uses of cash, offering insights into a company's financial health.
  3. Presentation Methods:

    • Companies can present the cash flow statement using either the direct method or the indirect method. The indirect method is more common, reconciling profit to cash flow, while the direct method lists specific cash flows such as cash in from sales and cash out for operating expenses.
  4. Cash Flow Definitions:

    • The article introduces essential cash flow definitions, including cash flow, cash balance, and cash equivalents. It emphasizes the importance of understanding these terms for a comprehensive grasp of the cash flow statement.
  5. Operating Cash Flow Section:

    • The operating activities section includes adjustments like depreciation and changes in working capital. Depreciation and amortization are added back to adjust net income, as they are non-cash expenses. Changes in working capital, such as inventory and accounts receivable, impact cash flow.
  6. Investing Cash Flow Section:

    • This section covers cash flows related to non-current assets and investments. Investments in property, plant, and equipment (PP&E) are considered capital expenditures, representing cash outflows.
  7. Financing Cash Flow Section:

    • Financing activities, including debt and equity transactions, are detailed in this section. Issuance of debt and equity is a cash inflow, while repayment of debt and equity repurchase are cash outflows.
  8. Net Increase/(Decrease) in Cash:

    • The article explains how the three sections are summed up to calculate the net increase or decrease in cash for a specific period, contributing to the closing cash balance.
  9. Differences in Presentation Methods:

    • Differences between the direct and indirect methods in presenting the operating section are discussed. The article also highlights potential variations in presenting interest expense or income under different accounting standards.
  10. Building a Statement of Cash Flows in a Financial Model:

    • Practical insights are provided on building a cash flow statement in an Excel financial model, emphasizing the linkage between income statements and balance sheets.
  11. Analyzing the Statement of Cash Flows:

    • The article concludes by highlighting the importance of analyzing the statement of cash flows to assess the quality of earnings and understand a company's cash inflows and outflows.

In summary, the Statement of Cash Flows is a critical tool for financial analysis, offering a comprehensive view of a company's cash position and financial performance. My in-depth knowledge and practical experience in this field enable me to navigate the complexities of cash flow management with precision and expertise.

Statement of Cash Flows (2024)

FAQs

What is the statement of cash flows? ›

A cash flow statement summarizes the amount of cash and cash equivalents entering and leaving a company. The CFS highlights a company's cash management, including how well it generates cash. This financial statement complements the balance sheet and the income statement.

How do you prepare a cash flow statement? ›

Four Steps to Prepare a Cash Flow Statement
  1. Start with the Opening Balance. ...
  2. Calculate the Cash Coming in (Sources of Cash) ...
  3. Determine the Cash Going Out (Uses of Cash) ...
  4. Subtract Uses of Cash (Step 3) from your Cash Balance (sum of Steps 1 and 2)

Which is a purpose of the statement of cash flows? ›

The purpose of the statement of cash flows is to provide a summary of cash receipt and cash payment information for a period of time and to reconcile the difference between beginning and ending cash balances shown on the balance sheet.

What is a proper statement of cash flows? ›

The three sections of the cash flow statement are: operating activities, investing activities and financing activities. Companies can choose two different ways of presenting the cash flow statement: the direct method or the indirect method. Most use the indirect method.

What are the three types of cash flow statements? ›

There are three cash flow types that companies should track and analyze to determine the liquidity and solvency of the business: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.

What is the difference between a balance sheet and a cash flow statement? ›

A balance sheet shows what a company owns in the form of assets and what it owes in the form of liabilities. A balance sheet also shows the amount of money invested by shareholders listed under shareholders' equity. The cash flow statement shows the cash inflows and outflows for a company during a period.

Is cash flow statement easy? ›

The cash flow statement is believed to be the most intuitive of all the financial statements because it follows the cash made by the business in three main ways: through operations, investment, and financing. The sum of these three segments is called net cash flow.

How is cash flow statement calculated? ›

You calculate cash flow by adjusting a company's net income through increasing or decreasing the differences in credit transactions, expenses and revenue (all of which are found on the income statements and balance sheets) between reporting periods.

Where do you start a cash flow statement? ›

For the more commonly used indirect method, begin with net income as a starting point and make the necessary balance sheet adjustments to arrive at an accurate cash flow figure. The following are some of the most common adjustments to net income when calculating cash flow: Depreciation.

What is the most important number on a statement of cash flows? ›

Regardless of whether the direct or the indirect method is used, the operating section of the cash flow statement ends with net cash provided (used) by operating activities. This is the most important line item on the cash flow statement.

What are the operating activities on a cash flow statement? ›

Cash flow from operations is the section of a company's cash flow statement that represents the amount of cash a company generates (or consumes) from carrying out its operating activities over a period of time. Operating activities include generating revenue, paying expenses, and funding working capital.

What is a statement of cash flow Quizlet? ›

Statement of Cash Flows. Shows the changes in cash for the same period of time as that covered by the income statement. The cash flow statement shows all sources of cash and all of the uses of cash. Provides information about cash receipts (inflows) and cash payments (outflows).

What is cash flow statement and its advantages? ›

Cash Flow Statement helps in knowing the exact figure of cash inflows and outflows from various operations of the business. It helps in comparing the cash budgets of past assessments with the present to assess the future requirements of the cash.

What does cash flow mean in business? ›

As the name suggests, cash flow is a term used to describe the money coming into and out of a business. Cash received – like money being paid to the business from its customers – would be inflow. Cash spent – like the funds being paid to vendor partners and other operational costs – would be outflow.

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