Your Money Revealed: Cash Flow Statements (2024)

One question is fundamental to any business: How much money is coming in versus how much isgoing out? A cash flow statement answers that and provides a clear picture of whether acompany has the cash it needs to pay its debts and fund operating expenses over a settimeframe. It’s one of the most important sources of insight into a company’s financialhealth.

What Is a Cash Flow Statement (CFS)?

A cash flow statement, also known as a statement of cash flows, is a financial statement thatdocuments the cash and cash equivalents a company generates and spends over a specificperiod. Cash flow statements reveal a business’s liquidity, help evaluate changes in assets,liabilities and equity, and make it easier when analysing operating performance.

Key takeaways

  • Cash flow statements show the cash impact of the decisions a company makes on operating,investing and financing activities.
  • A cash flow statement consists of three sections: cash from operating activities, cashfrom investing activities and cash from financing activities.
  • There are two methods for cash flow statement preparation: direct and indirect.
  • The direct method determines changes in cash receipts and payments. The indirect methodtakes the net income generated in a period and adds or subtracts changes in the assetand liability accounts to determine the implied cash flow.
  • A key component for any company are the changes in accounts receivable.
  • Investing activities should include asset purchases and sales, interest paid on loans,and payments related to mergers and acquisitions.
  • Negative cash flow is not always a cause for alarm; some businesses choose to spend moreto meet business goals and may rely on financing to get them to positive cash flowgeneration.

Why Do Businesses Need Cash Flow Statements?

The cash flow statement serves as a bridge between the income statement and the balancesheet. There are four key reasons why a cash flow statement is important:

  1. It reveals a business’ liquidity so that companies know just how much cash is on hand,and thus their projected runway to when cash is projected to runout.
  2. It details the specific changes in assets, liabilities and equity.
  3. It eliminates the effects of different bookkeeping techniques (for example cash basisversus accrual basis accounting), making it easier for investors to compare multiplefirms’ financial performance.
  4. It helps analyse and forecast the amount, timing and probability of future cash needs.

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How Cash Flow Statements Work

All publicly traded companies must file financial reports and statements with the Securitiesand Exchange Commission (SEC). The cash flow statement is one of three critical documents,along with the balance sheet and income statement, included in SEC filings. It providesinformation about cash receipts, cash payments and the net change in cash resulting from acompany’s operating, investing and financing activities.

Investors look to the cash flow statement for insights into a company’s financial footing.Meanwhile, creditors can use the cash flow statement to gauge liquidity and determinewhether a company can fund its operating expenses and pay off its debts.

What Is Included in a Cash Flow Statement?

A cash flow statement consists of three key components:

  • Cash flow from operating activities involves any cash flows fromcurrent assets and current liabilities. This section includes transactions from alloperational business activities, including buying and selling inventory and supplies aswell as paying employee salaries.
  • Cash flow from investing activities reflects results from investmentgains and losses. This section includes transactions such as equipment purchases, loansmade to suppliers or mergers and acquisitions. Analysts can rely on this section to findchanges in capital expenditures (CapEx).
  • Cash flow from financing activities measures cash flow between acompany and its owners and creditors. This section involves cash transactions related toraising money from stock or debt or repaying that debt. When cash flow from financingactivities contains a positive number, it’s a sign that there is more cash inflow thanoutflow. When the number is negative, it may indicate that a company is paying off debt,making dividend payments or buying back stock.

Additionally, the cash flow statement may include disclosure of non-cash activities whenprepared under generally accepted accounting principles (GAAP)—items like fixed assetdepreciation, goodwill amortisation and the like.

How is a Cash Flow Statement Produced?

There are two methods of cash flow statement preparation: direct and indirect. The bestchoice for your business depends on how much detail you need to include in your statement,as well as how much time you are willing to dedicate. While both methods are GAAP-approved,the International Accounting Standards Board (IASB) prefers the direct reporting method.However, most small businesses use the indirect method.

Direct vs. Indirect Methods of Producing a Cash Flow Statement

The main difference between the direct method and the indirect method of presenting thestatement of cash flows (SCF) involves the cash flows from operating activities. There areno differences in the cash flows from investing activities and the cash flows from financingactivities under either method—the real difference lies in the operating activities.

  • Direct cash flow method: This method relies on cash-basis accounting.Finance records revenues and expenses as cash is received or disbursed by the business.The direct method requires more organisation and legwork, since you subtract actual cashflows from inflows. Common line items using this method include customer receipts,payments to suppliers and employees, interest and dividends received and income taxpayments.
  • Indirect cash flow method: This method is based on accrual-basisaccounting, meaning revenue and expenses are counted when they are incurred rather thanwhen money actually changes hands. Finance looks at the transactions recorded on theincome statement and selectively reverses some of them to eliminate transactions thatdon’t show the movement of cash. This method also requires adjustments to add back anynon-operating activities, such as depreciation, that don’t impact operating cash flow.

Accounts Receivable and Cash Flow

When it comes to the balance sheet, any changes in accounts receivable must be reflected incash flow. A decrease in accounts receivable implies that more cash has entered the companyfrom customers paying off credit accounts. The amount accounts receivable decreased is addedto the company’s net sales. However, if accounts receivable increases, the amount of theincrease must be deducted from net sales. That’s because, while accounts receivable amountscount as revenue, they are not cash.

Inventory Value and Cash Flow

When inventory increases, it indicates that a company has spent money on raw materials. Ifcash were used in the purchase of that inventory, the increase would be deducted from netsales. On the flip side, if there were a decrease in inventory, that would be added to netsales. If the inventory was purchased on credit instead of cash, the balance sheet wouldreflect an increase in accounts payable, and that year-over-year increase would be added tonet sales.

Investing Activities and Cash Flow

Investing activities account for the income of a company’s investments. More specifically,these activities may include an asset purchase or sale, interest from loans or paymentsrelated to mergers and acquisitions.

Cash changes from making investments areconsidered use items, because cash is used on expenditures such as property, equipment orshort-term assets. But when an asset is divested, that transaction is considered a sourceand is listed in cash from investing activities.

Cash From Financing Activities

Financing activities involve both cash inflows and outflows from creditors. This categorycomprises the money that comes from investors or banks, dividend payments, and goes out forstock repurchases and the repayment of loans.

Not all financing activities involve the use of cash, and only activities that impact cashare reported in the cash flow statement. Non-cash financing activities include theconversion of debt to common stock or issuing a bond payable to discharge the liability.

A business’ financing activities shed light on its overall financial health and goals. Forexample, positive cash flow from financing activities is indicative of growth and expansion.More money flowing into a business signifies an increase in business assets. Meanwhile, cashoutflows from financing activities can signify improved liquidity. It may mean that acompany has paid off long-term debt or made a dividend payment to shareholders.

Negative Cash Flow Statements

In general, a positive cash flow statement is a sign of a healthy company. And yet a negativecash flow statement is not in itself cause for alarm. It may mean a business is new and hasspent a lot of money on property or equipment. Or, it could mean the business is in growthmode.

For example, Netflix had a negative cashflow for years while the company increased spending on original content. It was agamble, but some investors saw the strategy as a positive. More original content meant thebusiness would be better equipped to compete with other streaming services and TV networks.

Balance Sheet and Income Statement

The cash flow statement serves as a bridge between the income statement and the balance sheetby showing how cash moves in and out of a business during a specific period. The balancesheet involves a company’s assets and liabilities from one period to the next while theincome statement covers expenses and income over time.

Finance can reference both the balance sheet and the income statement while preparing a cashflow statement. The net cash flow in the cash flow statement between periods should equalthe change in cash between consecutive balance sheets of the period that the cash flowstatement covers. The cash flow statement is formulated by subtracting non-cash items fromthe income statement.

Cash Flow Statement Example

Below is an example of a cash flow statement for Macy’s department stores.

Cash flow statement
FY Ended 31 January 2020

Cash flow from operatingactivities
Net income564M
Additions to cash
Increase in accounts payable-277M
Subtractions to cash
Increase in accounts receivable-9M
Increase in inventory75M
Net cash from operations1.3B
Cash flow from investing
Purchase of equipment-657M
Cash flow from financing
Notes payable0
Cash flow for month ended January 31, 2020643M

As a seasoned financial expert with a profound understanding of cash flow management and financial statements, let's delve into the key concepts discussed in the provided article.

1. Cash Flow Statement (CFS):

  • Definition: The CFS, also known as a statement of cash flows, documents a company's cash and cash equivalents generated and spent over a specific period.
  • Purpose: It provides insights into a company's liquidity, changes in assets, liabilities, and equity, aiding in the analysis of operating performance.

2. Components of Cash Flow Statement:

  • Operating Activities: Involves cash flows from current assets and liabilities, including inventory transactions and employee salaries.
  • Investing Activities: Reflects results from investment gains and losses, such as equipment purchases, loans, and mergers and acquisitions.
  • Financing Activities: Measures cash flow between a company and its owners/creditors, including transactions related to raising money and debt repayments.

3. Methods of Cash Flow Statement Preparation:

  • Direct Method: Involves cash-basis accounting, tracking actual cash inflows and outflows (e.g., customer receipts, payments to suppliers). More detailed but less commonly used.
  • Indirect Method: Based on accrual-basis accounting, adjusting net income for non-cash items and reversing some transactions. More widely used, especially by small businesses.

4. Key Components and Considerations:

  • Accounts Receivable: Changes in accounts receivable impact cash flow. Decreases indicate cash inflow (customer payments), while increases require deduction from net sales.
  • Inventory Value: Increase in inventory reflects spending on raw materials. Decreases can be added to net sales, but credit purchases impact accounts payable.

5. Investing and Financing Activities:

  • Investing Activities: Involve income from investments and cash changes related to expenditures on assets or divestment of assets.
  • Financing Activities: Include cash inflows/outflows from investors, banks, dividend payments, stock repurchases, and loan repayments.

6. Positive vs. Negative Cash Flow:

  • Positive cash flow signals a healthy company, while negative cash flow isn't necessarily alarming. It can indicate growth, strategic spending, or a new business.

7. Relationship with Balance Sheet and Income Statement:

  • Balance Sheet: Involves a company's assets and liabilities, with changes reflected in the cash flow statement.
  • Income Statement: Covers expenses and income, and non-cash items are subtracted to formulate the cash flow statement.

8. Cash Flow Statement Example (Macy's):

  • Net cash from operating activities, investing activities (e.g., equipment purchase), and financing activities (e.g., notes payable) are detailed in the example.
  • The net cash flow should equal the change in cash between consecutive balance sheets.

In conclusion, a well-prepared cash flow statement is crucial for understanding a company's financial health, liquidity, and its ability to meet financial obligations. It acts as a vital bridge between the income statement and balance sheet, providing valuable insights for investors and creditors alike.

Your Money Revealed: Cash Flow Statements (2024)


What does a cash flow statement reveal? ›

Simply put, it reveals how a company spends its money (cash outflows) and where that money comes from (cash inflows). This statement is the best resource for testing a company's liquidity because it shows changes over time, rather than absolute dollar amounts at a specific point in time.

What are the 3 types of cash flow statement? ›

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. All three are included on a company's cash flow statement.

How should cash flow statement be presented? ›

Cash flows are classified and presented into operating activities (either using the 'direct' or 'indirect' method), investing activities or financing activities, with the latter two categories generally presented on a gross basis.

How do you read cash flow statement? ›

To interpret your company's cash flow statement, start by looking at the inflows and outflows of cash for each category: operating activities, investing activities, and financing activities. If all three areas show positive cash flow, your business is likely doing well (although there are exceptions).

What is important in cash flow statement? ›

The cash flow statement is a solid measure of a company's strength, profitability, and future outlook of a company. The importance of the cash flow statement is that it measures the cash inflows or cash outflows during the given period of time. This knowledge informs the company's short- and long-term planning.

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.

Does cash flow positive mean profitable? ›

Cash flow positive vs profitable: Cash flow is the cash a company receives and pays, but profit is the total revenue after disbursing all business expenses. Although being cash flow positive in most situations implies that the company is incurring profits, the two aren't the same.

What is an example of a cash flow? ›

What is a cash flow example? Examples of cash flow include: receiving payments from customers for goods or services, paying employees' wages, investing in new equipment or property, taking out a loan, and receiving dividends from investments.

What is an example of a positive cash flow? ›

Positive cash flow example

A small retail store generates $50,000 in revenue from the sale of its products in a month. The store's monthly expenses, including rent, utilities, payroll, and other expenses, total $30,000. This means that the store has a net cash flow of $50,000 - $30,000 = $20,000 for the month.

Who should prepare cash flow statement? ›

1. An enterprise should prepare a cash flow statement and should present it for each period for which financial statements are presented. 2. Users of an enterprise's financial statements are interested in how the enterprise generates and uses cash and cash equivalents.

Why is my cash flow statement not balancing? ›

When the cash flow statement does not balance, look again at each line item to verify that you have added the items that are sources of cash (like the increase of a liability) and deducted the items that represent cash outflows (like an increase of an asset).

Where do you start 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)

What is good cash flow ratio? ›

Generally, a ratio over 1 is considered to be desirable, while a ratio lower than that indicates strained financial standing of the firm.

How do I know if my cash flow statement is correct? ›

How can you ensure cash flow statement accuracy?
  1. Review your income statement and balance sheet.
  2. Categorize your cash flows correctly. ...
  3. Use the indirect method for operating cash flows. ...
  4. Reconcile your cash flows with your bank statements. ...
  5. Use accounting software and tools. ...
  6. Here's what else to consider.
Sep 14, 2023

How to calculate cash flow? ›

To calculate operating cash flow, add your net income and non-cash expenses, then subtract the change in working capital. These can all be found in a cash-flow statement.

What are the main types of cash flow? ›

3 types of cash flow
  • Operating cash flow.
  • Investing cash flow.
  • Financing cash flow.
Jul 12, 2023

What is the definition of as 3 cash flow statement? ›

The Standard deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities.

What are the different types of cash flow statement methods? ›

There are two ways to prepare a cash flow statement: the direct method and the indirect method:
  • Direct method – Operating cash flows are presented as a list of ingoing and outgoing cash flows. ...
  • Indirect method – The indirect method presents operating cash flows as a reconciliation from profit to cash flow.

What 3 things are categorized as outflows? ›

Cash Outflows include:

Operating expenses. Liabilities. Debts (long-term debts, reinvestments) Annual interest rates.


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