Cash Flow Statement

What Is a Cash Flow Statement?

• A cash flow statement (CFS) is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company. 
• The CFS measures how well a company manages its cash position, meaning how well the company generates cash. 
• The CFS complements the balance sheet and the income statement. 
• The main components of the CFS are cash from three areas: operating activities, investing activities, and financing activities.
• The two methods of calculating cash flow are the direct method and the indirect method.

 

How the Cash Flow Statement Is Used

The CFS allows investors to understand how a company’s operations are running, where its money is coming from, and how money is being spent. The CFS is important since it helps investors determine whether a company is on solid financial footing.

Creditors, on the other hand, can use the CFS to determine how much cash is available (referred to as liquidity) for the company to fund its operating expenses and pay down its debts.

Structure of the Cash Flow Statement

The main components of the cash flow statement are:

1.      Cash from operating activities

2.      Cash from investing activities

3.      Cash from financing activities

4.      Disclosure of non-cash activities, which is sometimes included when prepared under generally accepted accounting principles (GAAP).

 

It’s important to note that the CFS is distinct from the income statement and the balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded as revenues and expenses. Therefore, cash is not the same as net income—which, on the income statement, includes cash sales as well as sales made on credit.