Cash Flow Statement: Explanation and Example

The statement of cash flows, or the cash flow statement (CFS), is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company.

Like the income statement, it also measures the performance of a company over a period of time. However, it differs because it is not as easily manipulated by the timing of non-cash transactions.

Cash Flow

What Is a Cash Flow Statement?

A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period. 

A company’s financial statements offer investors and analysts a portrait of all the transactions that go through the business, where every transaction contributes to its success.

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.

Structure of the Cash Flow Statement

The main components of the cash flow statement are:

  • Cash from operating activities
  • Cash from investing activities
  • Cash from financing activities
  • Disclosure of non-cash activities, which is sometimes included when prepared under generally accepted accounting principles (GAAP).

Three Sections of the Statement of Cash Flows:

  1. Operating Activities: The principal revenue-generating activities of an organization and other activities that are not investing or financing; any cash flows from current assets and current liabilities.
  2. Investing Activities: Any cash flows from the acquisition and disposal of long-term assets and other investments not included in cash equivalents
  3. Financing Activities: Any cash flows that result in changes in the size and composition of the contributed equity capital or borrowings of the entity (i.e., bonds, stock, dividends)

Calculate Cash Flow from Operating Activities

You need to calculate cash flow from operating activities. This is typically thought of as the most important section, as it shows how much cash was generated from a business’s actual operations.

Cash flow from operations can be calculated using either the direct or indirect method.

Cash Flow Statement

Direct Method vs Indirect Method of Presentation

There are two methods of producing a statement of cash flows, the direct method, and the indirect method.

In the direct method, all individual instances of cash that are received or paid out are tallied up and the total is the resulting cash flow.

In the indirect method, the accounting line items such as net income, depreciation, etc. are used to arrive at cash flow.  In financial modeling, the cash flow statement is always produced via the indirect method.

Calculate Cash Flow from Investing Activities

After calculating cash flow from operating activities, you need to calculate cash flow from investing activities. This section of the cash flow statement details cash flows related to the buying and selling of long-lived assets like property, facilities, and equipment. Keep in mind that this section only includes investing activities involving free cash, not debt.

Cash Flow from Financing Activities

This section covers revenue earned or assets spent on Financing Activities. When you pay off part of your loan or line of credit, money leaves your bank accounts. When you tap your line of credit, get a loan, or bring on a new investor, you receive cash in your accounts.

Negative cash flow vs. positive cash flow

When your cash flow statement shows a negative number at the bottom, that means you lost cash during the accounting period—you have negative cash flow.

It’s important to remember that long-term, negative cash flow isn’t always a bad thing. For example, early-stage businesses need to track their burn rate as they try to become profitable.

When you have a positive number at the bottom of your statement, you’ve got positive cash flow for the month.

Keep in mind, positive cash flow isn’t always a good thing in the long term. While it gives you more liquidity now, there are negative reasons you may have that money—for instance, by taking on a large loan to bail out your failing business. Positive cash flow isn’t always positive overall.

Format of Statement of Cash Flows

Example: cash flow of XYZ:

XYZ co. Ltd. Cash Flow Statement
(all numbers in millions of Rs.)
Period ending30 June
2021
30 June
2020
30 June
2019
Net income21,53824,58917,046
Operating activities, cash flows provided by or used in:
Depreciation and amortization2,7902,5922,747
Adjustments to net income4,6176212,910
Decrease (increase) in accounts receivable12,50317,236
Increase (decrease) in liabilities (A/P, taxes payable)131,62219,82237,856
Decrease (increase) in inventories
Increase (decrease) in other operating activities(173,057)(33,061)(62,963)
    Net cash flow from operating activities1331,799(2,404)
Investing activities, cash flows provided by or used in:
Capital expenditures(4,035)(3,724)(3,011)
Investments(201,777)(71,710)(75,649)
Other cash flows from investing activities1,60617,009(571)
    Net cash flows from investing activities(204,206)(58,425)(79,231)
Financing activities, cash flows provided by or used in:
Dividends paid(9,826)(9,188)(8,375)
Sale (repurchase) of stock(5,327)(12,090)133
Increase (decrease) in debt101,12226,65121,204
Other cash flows from financing activities120,46127,91070,349
    Net cash flows from financing activities206,43033,28383,311
Effect of exchange rate changes645(1,840)731
Net increase (decrease) in cash and cash equivalents2,8824,8172,407

FINANCIAL DECISION-MAKING

Whether you’re a manager, entrepreneur, or individual contributor, understanding how to create and leverage financial statements is essential for making sound business decisions.

The statement of cash flows is one of the most important financial reports to understand because it provides detailed insights into how a company spends and makes its cash.

By learning how to create and analyze cash flow statements, you can make better, more informed decisions, regardless of your position.

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