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What is a cash flow statement?

Key takeaways

  • A cash flow statement is one of the 3 main types of financial statements that publicly traded companies prepare, along with the balance sheet and income statement.
  • It shows the cash payments coming in and going out of the company over a period of time—usually a quarter or a year.
  • A cash flow statement is generally broken down into 3 main sections: operating activities, investing activities, and financing activities.
  • Investors can use a cash flow statement to better understand a company’s performance and to help them decide if they want to invest.

A cash flow statement is one of the 3 main types of financial statements that publicly traded companies typically prepare and publish for investors to review. The cash flow statement reports the cash coming in and out of the business over a given period, such as one quarter or one year, and along with the other financial statements can help investors gain a more complete understanding of a company’s business and potential risks.

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What is a cash flow statement?

A cash flow statement is a financial statement that shows the cash going in and out of a business over a set period. A company’s accounting department keeps track of every transaction that involves cash, such as receiving money when a client pays an invoice or sending money out to make payroll or meet a loan payment.

The cash flow statement aggregates and summarizes all these transactions—helping give investors and other stakeholders a more complete picture of the business’s operations, standing, and trends.

How cash flow is calculated

Cash flow is calculated by adding any cash that came into the company over the period in question, and subtracting any outflows of cash over the same period. If a company brought in more cash than it paid out, it had positive cash flow over the period. If a company paid out more cash than it brought in, then it had negative cash flow over the period.

What is on a cash flow statement?

A cash flow statement is generally broken down into 3 main sections: operating activities, investing activities, and financing activities.

Operating activities

The operating activities section of a cash flow statement summarizes cash inflows and outflows involved with running the business itself. Inflows might include cash received from customers, and outflows might include cash paid to suppliers and employees.

However, how this information is presented depends on whether a company uses the “direct method” or “indirect method” for operating cash flows. Under the direct method, these cash inflows from customers and outflows to employees and suppliers are presented as such. Under the “indirect method,” the cash flow statement starts with net income (aka profits) from its income statement, and adjusts for non-cash and non-operating items, to reconcile net income to the net cash flow from operations.

Which format a company uses does not impact the final operating cash flow number it reports. These are just 2 different ways to get to the same number.

Investing activities

The investing activities section shows cash inflows and outflows from long-term company investments in assets like land, buildings, and equipment. It may also include investments the company holds in financial assets, like another company’s bonds or stock. If a company spends cash to buy a building, it shows up as an outflow. If a company sold a piece of land, or had some bond holdings mature, the proceeds would show as a cash inflow.

Financing activities

The financing activities section generally shows inflows and outflows to or from investors and lenders. If a company issued stock or bonds during the period in question, the proceeds would show up as an inflow. If the company bought back stock or had bonds mature during the period, the payments would show up as an outflow.

How to read a cash flow statement

Now that you understand the basics, let’s look more in depth at how to read a cash flow statement. The statement will generally be broken up into those 3 different sections: operating, investing, and financing activities. Within each section, you’ll see rows corresponding to various types of inflows and outflows. Inflows generally appear as a regular number, while outflows generally appear in parentheses.

Many companies have such large businesses that they show numbers on their cash flow statement in thousands or in millions—if they do, there will be a note at the top of the statement explaining this. So for example, if it says “in millions” at the top of the page and the statement of cash flows includes a row that shows ($300) for accounts payable, it means the company paid $300 million of cash to accounts payable during the period.

You generally read a statement of cash flows from top to bottom, adding or subtracting for each line item to arrive at a total inflow or outflow for each of those 3 categories of cash flows.

Cash flow statement example

Here is a basic example of a cash flow statement for a hypothetical small business. The cash flow statement of a large corporation will typically be longer with more line items and bigger numbers. However, you can see how to read a statement from this example (the operating activities section in this example follows the indirect method):

Company XYZ statement of cash flows
Operating activities
Net income $270,000
Increase in accounts receivable ($30,000)
Increase in inventory ($20,000)
Net cash flow from operating activities $220,000
Investing activities
Sale of a company vehicle $10,000
Payment for acquisition of equipment ($50,000)
Net cash flow from investing activities ($40,000)
Financing activities
Debt payments ($30,000)
Net cash flow from financing activities ($30,000)
Net cash flow $150,000
Cash on hand at start of period $70,000
Cash on hand at end of period $220,000

Figures are hypothetical and for illustrative purposes only.

You could search online for cash flow statement examples from companies you might invest in. These are generally available on a company’s investor relations website and through the website of the US Securities and Exchange Commission.

Cash flow statement vs. balance sheet vs. income statement

A company's 3 main financial statements are the cash flow statement, the balance sheet, and the income statement. Each document provides a different perspective on the company’s financial positioning and business performance, so it’s a good idea to look at all 3 to get a more complete picture of how the company is doing.

Here are some basics on these other 2 important financial statements.

Balance sheet

A balance sheet shows what a company owns and what it owes. While a statement of cash flows shows money going in and out of the company over a period of time, the balance sheet gives a snapshot of the company’s financial standing at a point in time. The main categories you’ll generally see on a balance sheet are assets (what the company owns), liabilities (what it owes), and shareholder equity (a measure of the value of the company to its owners. A balance sheet must always “balance,” in that assets minus liabilities must always equal shareholder equity.

Income statement

An income statement can also be called a profit-and-loss (P&L) statement. Like a cash flow statement, the income statement shows the company’s performance over a period of time. The top of an income statement starts with revenue, which essentially means the total dollar value of sales the company completed in the period. Then the income statement subtracts (or in some cases adds) for various items, such as the costs of goods sold, administrative expenses, interest expense, and taxes. The bottom of the income statement is profits, which can also be called net income. That’s why profits are often called a company’s “bottom line.”

Although it might sound like an income statement covers the same material as a cash flow statement, a company’s profits and its cash inflows can actually look very different. For example, suppose a company makes a sale on credit. That sale would show up as revenue and contribute to profits on the income statement, but might not translate into a cash inflow until a later period.

Why cash flow statements are important

Cash flow statements provide essential insights into a company’s financial performance and health. Although news headlines are more likely to focus on a company’s profits (also known as earnings), through the cash flow statement, you might discover trends hidden behind sales and profit numbers. A company might achieve profitability by making lots of sales on credit. But if it’s unable to collect payments from customers, eventually, the company could run into trouble.

Some investors may also use the cash flow statement to help them decide whether or not to invest in a stock, such as by looking at free cash flow per share, or calculating a present value of estimated future cash flows.

What to keep in mind when reading a cash flow statement

Reading a cash flow statement can feel confusing at first to new investors. But as you become more familiar with the language of financial statements it may become easier to make sense of them.

You can start by looking at the final result: Did the company increase or decrease its overall cash position? Then look at why. While an increase in overall cash might look good at first, it could be a concern if the inflow came from issuing debt, but the company had negative operating cash flow. Simply reading through each line item might help you discover details that you want to look into further, and that can help you better understand the business.

To gain a more complete picture of the company’s financial health, you should also look at the balance sheet and income statement, and even consider tracking these over time. Looking at a company’s financial statements and comparing them against the statements of competitors or peers in the same industry can help provide further context. Without the full context, you may not completely understand how the company is doing.

Cash flow statements and other financial statements are generally included in a company’s quarterly and annual reports to shareholders.

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